Annual Report 2018
Live the DifferenceTM
Live the Difference / Vive la Diferencia
Now in its 55th year in business, OFG Bancorp
is a diversified financial holding company that
operates under U.S. and Puerto Rico banking
laws and regulations.
Our principal subsidiaries – Oriental Bank,
Oriental Financial Services and Oriental
Insurance – provide retail and commercial
banking, lending and wealth management
products, services and technology, primarily
in Puerto Rico.
We invite customers to Live the Difference
by making banking Fácil, Rápido, Hecho
(Easy, Fast, Done).
Combining the best of brick-and-mortar and
innovative technology, we are dedicated to
making Oriental more convenient, more helpful,
and easier to use.
The end result is an unparalleled level of
value-added service that enables our customers
to achieve more.
Visit us at www.orientalbank.com and
www.ofgbancorp.com.
TO OUR SHAREHOLDERS
In line with our slogan – Live the Difference
(Vive la Diferencia) – OFG Bancorp achieved
strong growth in 2018 as we continued to make a
difference for both our customers and shareholders.
Once again, we are bringing our yearly report to
life through our 2018 digital annual report site.
Please visit http://annualreport.orientalbank.com
to see and hear our results and strategic initiatives.
Thank you.
José Rafael Fernández
President, CEO, Vice Chairman of the Board
Form 10-K
( F. P. O . )
interior.indd 2
3/12/19 7:50 AM
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, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 001-12647
OFG Bancorp
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0538893
Principal Executive Offices:
254 Muñoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone Number: (787) 771-6800
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock ($1.00 par value per share)
7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)
7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)
7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Ac.t
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the common stock held by non-affiliates of OFG Bancorp (the “Company”) was approximately $618.0 million as of
June 30, 2018 based upon 43,983,195 shares outstanding and the reported closing price of $14.05 on the New York Stock Exchange on that date.
As of February 28, 2019, the Company had 51,318,899 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement relating to the 2019 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, 2018
TABLE OF CONTENTS
PART I
Business ..................................................................................................................................................................
Item 1.
Item 1A. Risk Factors ............................................................................................................................................................
Item 1B. Unresolved Staff Comments ...................................................................................................................................
Item 2.
Properties ................................................................................................................................................................
Legal Proceedings ...................................................................................................................................................
Item 4. Mine Safety Disclosures .........................................................................................................................................
Item 3.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .....................................................................................................................................................
Selected Financial Data ..........................................................................................................................................
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................................................
Financial Statements and Supplementary Data .......................................................................................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................
Item 9.
Item 9A. Controls and Procedures .........................................................................................................................................
Item 9B. Other Information ...................................................................................................................................................
PART III
1
15
24
24
24
24
24
26
29
83
88
206
206
206
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...............
207
Item 15. Exhibits and Financial Statement Schedules ..........................................................................................................
Item 16. Form 10-K Summary .............................................................................................................................................
208
208
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 “Oriental”), including, but not
limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of
interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new
accounting standards on the Oriental’s financial condition and results of operations. All statements contained herein that are not
clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,”
“project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,”
or similar expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by
management that are difficult to predict. Various factors, some of which by their nature are beyond Oriental’s control, could cause
actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause
such a difference include, but are not limited to:
the rate of growth in the economy and employment levels, as well as general business and economic conditions;
•
• changes in interest rates, as well as the magnitude of such changes;
•
• amendments to the fiscal plan approved by the Financial Oversight and Management Board for Puerto Rico;
• determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and
the credit default by municipalities of the government of Puerto Rico;
•
•
all of its agencies, including some of its public corporations;
the impact of property, credit and other losses in Puerto Rico as a result of hurricanes, earthquakes and other natural disasters;
the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical
infrastructure, which suffered catastrophic damages caused by hurricane Maria;
the pace and magnitude of Puerto Rico’s economic recovery;
the fiscal and monetary policies of the federal government and its agencies;
•
•
• changes in federal bank regulatory and supervisory policies, including required levels of capital;
•
the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico;
•
the performance of the stock and bond markets;
• competition in the financial services industry; and
• possible legislative, tax or regulatory changes.
Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-
looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the
job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets,
charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding
sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements
and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial
assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and
interpretations; increased competition; Oriental’s ability to grow its core businesses; decisions to downsize, sell or close units or
otherwise change Oriental’s business mix; and management’s ability to identify and manage these and other risks.
All forward-looking statements included in this annual report on Form 10-K are based upon information available to Oriental as of the
date of this report, and other than as required by law, including the requirements of applicable securities laws, Oriental assumes no
obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
ITEM 1. BUSINESS
General
Oriental is a publicly-owned financial holding company incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto
Rico, providing a full range of banking and financial services through its subsidiaries. Oriental is subject to the provisions of the
U.S. Bank Holding Company Act of 1956, as amended, (the “BHC Act”) and accordingly, subject to the supervision and regulation of
the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).
Oriental provides comprehensive banking and financial services to its clients through a complete range of banking and financial
solutions, including commercial, consumer, auto, and mortgage lending; checking and savings accounts; financial planning, insurance,
financial services, and investment brokerage; and corporate and individual trust and retirement services. Oriental operates through
three major business segments: Banking, Wealth Management, and Treasury, differentiating the Oriental brand through customer
segmentation and innovative solutions, primarily in Puerto Rico. Oriental provides these services through various subsidiaries
including, a commercial bank, Oriental Bank (the "Bank"), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental
Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), a retirement plan administrator, Oriental
Pension Consultants, Inc. (“OPC”), and a commercial lender, OFG USA LLC ("OFG USA"), which is part of the Bank. All of our
subsidiaries are based in San Juan, Puerto Rico, except for OPC which is based in Boca Raton, Florida and OFG USA which is based
in Cornelius, North Carolina. Oriental has 37 branches in Puerto Rico. Oriental’s long-term goal is to strengthen its banking and
financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of
banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and
financial services, and improving operating efficiencies.
Oriental’s strategy involves:
• Expanding its ability to attract deposits and build relationships with customers by refining service delivery and
providing innovative banking technologies for day-to-day customer transactions, and achieving sustainable levels of
differentiation in the market;
• Focusing on greater growth in commercial and consumer lending, trust and financial services, and insurance products;
•
•
Improving operating efficiencies, and continuing to maintain effective asset-liability management;
Implementing a broad ranging effort to instill in employees and make customers aware of Oriental’s determination to
effectively serve and advise its customer base in a responsive and professional manner; and
• Matching its portfolio of investment securities with the related funding to achieve favorable spreads, and primarily
investing in U.S. government-sponsored agency obligations.
Together with a highly experienced group of senior and mid-level executives and the benefits from the acquisitions of Eurobank
Puerto Rico and the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”), this strategy has resulted in
sustained growth in Oriental’s deposit-taking activities, commercial, consumer and mortgage lending and financial service activities,
allowing Oriental to distinguish itself in a highly competitive industry. Oriental is not immune from general and local financial and
economic conditions. Past experience is not necessarily indicative of future performance but given market uncertainties and on a
reasonable time horizon of three to five years, this strategy is expected to maintain its steady progress towards Oriental’s long-term
goal.
Oriental’s principal funding sources are branch deposits, securities sold under agreements to repurchase, Federal Home Loan Bank
(“FHLB”) advances, wholesale deposits, and subordinated capital notes. Through its branch network, Oriental Bank offers personal
non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts (“IRAs”)
and commercial non-interest bearing checking accounts. The FDIC insures the Bank’s deposit accounts up to applicable limits.
Management makes retail deposit pricing decisions periodically, adjusting the rates paid on retail deposits in response to general
market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, the London
Interbank Offered Rate (“LIBOR”), and mainland U.S. market interest rates.
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Segment Disclosure
Oriental has three reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable
segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as
Oriental’s organizational structure, nature of products, distribution channels and economic characteristics of the products were also
considered in the determination of the reportable segments. Oriental measures the performance of these reportable segments based on
pre-established annual goals involving different financial parameters such as net income, interest rate spread, loan production, and fees
generated.
For detailed information regarding the performance of Oriental’s operating segments, please refer to Note 29 in Oriental’s
accompanying consolidated financial statements.
Banking Activities
The Bank, Oriental’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan, Puerto
Rico. The Bank has 37 branches throughout Puerto Rico and was incorporated in October 1964 as a federal mutual savings and loan
association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its
conversion from a federally-chartered savings bank to a commercial bank chartered under the banking law of the Commonwealth of
Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in
its businesses. As a Puerto Rico-chartered commercial bank, it is subject to examination by the FDIC and the Office of the
Commissioner of Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking services such as commercial, consumer,
and mortgage lending, savings and time deposit products, financial planning, and corporate and individual trust services, and
capitalizes on its retail banking network to provide commercial and mortgage lending products to its clients. The Bank has an
operating subsidiary, OFG USA, which is organized in Delaware. It also has two international banking entities (each an “IBE”)
organized in Puerto Rico pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”),
one is a unit operating within the Bank, named Oriental Overseas (the “IBE Unit”), and the other is a wholly-owned subsidiary of the
Bank, named Oriental International Bank, Inc. (the “IBE Subsidiary”). The IBE Unit and IBE Subsidiary offer the Bank certain Puerto
Rico tax advantages, and their services are limited under Puerto Rico law to persons and assets/liabilities located outside of Puerto
Rico.
Banking activities include the Bank’s branches and mortgage banking activities with traditional retail banking products such as
deposits, commercial loans, consumer loans and mortgage loans. The Bank’s significant lending activities are with consumers located
in Puerto Rico. The Bank’s lending transactions include a diversified number of industries and activities, all of which are
encompassed within four main categories: commercial, consumer, mortgage and auto.
Oriental’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly into the secondary market or the
securitization of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”)
insured mortgages, Veterans Administration (“VA”) guaranteed mortgages, and Rural Housing Service (“RHS”) guaranteed loans that
are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which
can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting
requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan
Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of
FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA and FHLMC mortgage loans for issuance of
FNMA and FHLMC mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed securities. Oriental
outsources the servicing of the residential mortgage loan portfolio acquired in 2012 as part of its acquisition of the Puerto Rico
operations of BBVA (the "BBVAPR Acquisition") and services the GNMA, FNMA, and FHLMC pools that it issues and the rest of
its residential mortgage loan portfolio.
Loan Underwriting
Auto loans: Oriental provides financing for the purchase of new or used motor vehicles. These loans are generated mainly through
dealers authorized and approved by the auto credit department committee of Oriental. The auto credit department has the specialized
structure and resources to provide the service required for this product according to market demands and trends. The auto loan credit
policy establishes specific guidance and parameters for the underwriting and origination processes. Underwriting procedures, lending
2
limits, interest rate approval, insurance coverage, and automobile brand restrictions are some parameters and internal controls
implemented to ensure the quality and profitability of the auto loan portfolio. The proprietary credit scoring system is a fundamental
part of the decision process.
Consumer loans: Consumer loans include personal loans, credit cards, lines of credit and other loans made by banks to individual
borrowers. All loan originations must be underwritten in accordance with Oriental’s underwriting criteria and include an assessment of
each borrower’s personal financial condition, including verification of income, assets, Fair Isaac Corporation ("FICO") score, and
credit reports. The proprietary credit scoring system is a fundamental part of the decision process.
Residential mortgage loans: All loan originations, regardless of whether originated through Oriental’s retail banking network or
purchased from third parties, must be underwritten in accordance with Oriental’s underwriting criteria, including loan-to-value ratios,
borrower income qualifications, debt ratios and credit history, investor requirements, and title insurance and property appraisal
requirements. Oriental’s mortgage underwriting standards comply with the relevant guidelines set forth by the Department of Housing
and Urban Development (“HUD”), VA, FNMA, FHLMC, federal and Puerto Rico banking regulatory authorities, as applicable.
Oriental’s underwriting personnel, while operating within Oriental’s loan offices, make underwriting decisions independent of
Oriental’s mortgage loan origination personnel.
Commercial loans: Commercial loans include lines of credit and term facilities to finance business operations and to provide working
capital for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower’s cash flow from
operations is generally the primary source of repayment, Oriental’s analysis of the credit risk focuses heavily on the borrower’s debt-
repayment capacity. Commercial term loans generally have terms from one to five years, may be collateralized by the asset being
acquired, real estate, or other available assets, and bear interest rates that float with the prime rate, LIBOR or another established
index, or are fixed for the term of the loan. Lines of credit are extended to businesses based on an analysis of the financial strength and
integrity of the borrowers and are generally secured primarily by real estate, accounts receivables or inventory, and have a maturity of
one year or less. Such lines of credit bear an interest rate that floats with a base rate, the prime rate, LIBOR, or another established
index.
Sale of Loans and Securitization Activities
Oriental may engage in the sale or securitization of the residential mortgage loans that it originates. Oriental is an approved issuer of
GNMA-guaranteed mortgage-backed securities which involves the packaging of FHA loans, RHS loans and VA loans into pools.
Oriental can also act as issuer in the case of conforming conventional loans which involves grouping these types of loans into pools
and issuing FNMA or FHLMC mortgage-backed securities. The issuance of mortgage-backed securities provides Oriental with the
flexibility of either selling the security into the open market or retaining it on books. In the case of conforming conventional loans,
Oriental may also sell such loans through the FNMA and FHLMC cash window programs.
Wealth Management Activities
Wealth management activities are generated by such businesses as securities brokerage, trust services, retirement planning, insurance,
pension administration, and other financial services.
Oriental Financial Services is a Puerto Rico corporation and Oriental’s subsidiary engaged in securities brokerage activities in
accordance with Oriental’s strategy of providing fully integrated financial solutions, covering various investment alternatives such as
tax-advantaged fixed income securities, mutual funds, stocks, and bonds to retail and institutional clients. It also offers separately-
managed accounts and mutual fund asset allocation programs sponsored by unaffiliated professional asset managers. These services
are designed to meet each client’s specific needs and preferences, including transaction-based pricing and asset-based fee pricing. It
has managed and participated in public offerings and private placements of debt and equity securities in Puerto Rico and has engaged
in municipal securities business with the Commonwealth of Puerto Rico and its instrumentalities, municipalities, and public
corporations. Oriental Financial Services, a member of FINRA and the Securities Investor Protection Corporation, is a registered
securities broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. The broker-dealer does not carry customer
accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such
rule. It clears securities transactions through Pershing LLC, a clearing agent that carries the accounts of its customers on a “fully
disclosed” basis.
Oriental Insurance is a Puerto Rico limited liability company and Oriental’s subsidiary engaged in insurance agency services. It
provides Oriental with cross-marketing opportunities under the legal framework established by the financial modernization legislation.
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Oriental Insurance currently earns commissions by acting as a licensed insurance agent in connection with the issuance of insurance
policies by unaffiliated insurance companies and continues to cross market its services to Oriental’s existing customer base.
OPC, a Florida corporation, is Oriental’s subsidiary engaged in the administration of retirement plans in the U.S., Puerto Rico, and the
Caribbean.
Corporate and individual trust services are provided by the Bank’s trust division.
Treasury Activities
Treasury activities encompass all of Oriental’s treasury-related functions. Oriental’s investment portfolio consists of mortgage-backed
securities, obligations of U.S. government-sponsored agencies and money market instruments. Agency mortgage-backed securities,
the largest component of the investment portfolio, consist principally of pools of residential mortgage loans that are made to
consumers and then resold in the form of pass-through certificates in the secondary market, the payment of interest and principal of
which is guaranteed by GNMA, FNMA or FHLMC.
Market Area and Competition
The main geographic business and service area of Oriental is in Puerto Rico, where the banking market is highly competitive. Puerto
Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States of
America. Oriental also competes with brokerage firms with retail operations, credit unions, savings and loan cooperatives, small loan
companies, insurance agencies, and mortgage banks in Puerto Rico. Oriental encounters intense competition in attracting and retaining
deposits and in its consumer and commercial lending activities. Management believes that Oriental has been able to compete
effectively for deposits and loans by offering a variety of transactional account products and loans with competitive terms,
emphasizing the quality of its service, pricing its products at competitive interest rates, offering convenient branch locations, and
offering financial planning and financial services at most of its branch locations. The phase-out consolidation of three failed Puerto
Rico banks in 2010 and the failure of another Puerto Rico bank in 2015 has created an environment for more rational loan and deposit
pricing. Oriental’s ability to originate loans depends primarily on the services that it provides to its borrowers, in making prompt credit
decisions, and on the rates and fees that it charges.
Oriental is also developing new commercial relationships in the United States, as it launched in late 2017 the U.S. commercial loan
program, generally consisting of purchases of loan participations in credit facilities to commercial borrowers in the U.S. mainland.
Regulation and Supervision
General
Oriental is a financial holding company subject to supervision and regulation by the Federal Reserve Board under the BHC Act, as
amended by the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”). The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding
company requires that a bank holding company and all of the subsidiary banks controlled by it at the time of election must be and
remain at all times “well capitalized” and “well managed.”
Oriental elected to be treated as a financial holding company as permitted by the Gramm-Leach-Bliley Act. Under that law, if Oriental
fails to meet the requirements for being a financial holding company and is unable to correct such deficiencies within certain
prescribed time periods, the Federal Reserve Board could require Oriental to divest control of its depository institution subsidiary or
alternatively cease conducting activities that are not permissible for bank holding companies that are not financial holding companies.
Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature or
incidental to such financial activity, or (ii) complementary to a financial activity provided it does not pose a substantial risk to the
safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides
that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities;
(b) insurance activities; (c) financial, investment or economic advisory services; (d) securitization of assets; (e) securities underwriting
and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and
(h) merchant banking activities. A financial holding company may generally commence any activity, or acquire any company, that is
financial in nature without prior approval of the Federal Reserve Board. As provided by the Dodd-Frank Act, a financial holding
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company may not acquire a company, without prior Federal Reserve Board approval, in a transaction in which the total consolidated
assets to be acquired by the financial holding company exceed $10 billion.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand
the list of financial or incidental activities, but requires consultation with the U.S. Treasury Department and gives the Federal Reserve
Board authority to allow a financial holding company to engage in any activity that is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the financial system.
Oriental is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its own
business operations and those of its subsidiaries. In addition, Federal Reserve Board approval must also be obtained before a bank
holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding
company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their
non-bank subsidiaries.
The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the
OCFI and the FDIC. The Bank is subject to extensive regulation and examination by the OCFI and the FDIC and is subject to the
Federal Reserve Board’s regulation of transactions between the Bank and its affiliates. The federal and Puerto Rico laws and
regulations which are applicable to the Bank regulate, among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for certain loans. In
addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as
it attempts to control the money supply and credit availability in order to control inflation in the economy.
Oriental’s mortgage banking business is subject to the rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA
with respect to the origination, processing, servicing and selling of mortgage loans and the sale of mortgage-backed securities. Those
rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for
inspections and appraisal reports, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to
VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act,
the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and
settlement costs. Oriental is also subject to regulation by the OCFI with respect to, among other things, licensing requirements and
maximum origination fees on certain types of mortgage loan products.
Oriental and its subsidiaries are subject to the rules and regulations of certain other regulatory agencies. Oriental Financial Services, as
a registered broker-dealer, is subject to the supervision, examination and regulation of FINRA, the SEC, and the OCFI in matters
relating to the conduct of its securities business, including record keeping and reporting requirements, supervision and licensing of
employees, and obligations to customers.
Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto
Rico in matters relating to insurance sales, including but not limited to, licensing of employees, sales practices, charging of
commissions and reporting requirements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act implemented a variety of far-reaching changes and has been described as the most sweeping reform of the
financial services industry since the 1930’s. It has a broad impact on the financial services industry, including significant regulatory
and compliance changes, such as: (i) enhanced resolution authority of troubled and failing banks and their holding companies;
(ii) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower;
(iii) increased capital and liquidity requirements; (iv) increased regulatory examination fees; (v) changes to assessments to be paid to
the FDIC for federal deposit insurance; (vi) prohibiting bank holding companies, such as Oriental, from including in regulatory Tier 1
capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (vii) numerous other provisions
designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be
distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal
Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate
governance and executive compensation matters that affect most U.S. publicly traded companies, including Oriental. A few provisions
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of the Dodd-Frank Act became effective immediately, while various provisions have become effective in stages. Many of the
requirements called for in the Dodd-Frank Act have been implemented over time and most are subject to implementing regulations.
The Dodd-Frank Act also created a new consumer financial services regulator, the Bureau of Consumer Financial Protection (the
“CFPB”), which assumed most of the consumer financial services regulatory responsibilities previously exercised by federal banking
regulators and other agencies. The CFPB’s primary functions include the supervision of “covered persons” (broadly defined to include
any person offering or providing a consumer financial product or service and any affiliated service provider) for compliance with
federal consumer financial laws. It has primary authority to enforce the federal consumer financial laws, as well as exclusive authority
to require reports and conduct examinations for compliance with such laws, in the case of any insured depository institution with total
assets of more than $10 billion and any affiliate thereof. The CFPB also has broad powers to prescribe rules applicable to a covered
person or service provider in connection with any transaction with a consumer for a consumer financial product or service, or the
offering of a consumer financial product or service.
Holding Company Structure
The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including Oriental), whether in the
form of loans, other extensions of credit, investments or asset purchases, among others. Such transfers are limited to 10% of the
transferring institution’s capital stock and surplus with respect to any affiliate (including Oriental), and, with respect to all affiliates, to
an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specified amounts, carried out on an arm’s length basis, and consistent with safe and sound banking
practices.
Under the Dodd-Frank Act, a bank holding company, such as Oriental, must serve as a source of financial strength for any subsidiary
depository institution. The term “source of financial strength” is defined as the ability of a company to provide financial assistance to
its insured depository institution subsidiaries in the event of financial distress at such subsidiaries. This support may be required at
times when, absent such requirement, the bank holding company might not otherwise provide such support. In the event of a bank
holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital
of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans
by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of Oriental.
Since Oriental is a financial holding company, its right to participate in the assets of any subsidiary upon the latter’s liquidation or
reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of the Bank) except to
the extent that Oriental is a creditor with recognized claims against the subsidiary.
Dividend Restrictions
The principal source of funds for Oriental is the dividends from the Bank. The ability of the Bank to pay dividends on its common
stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the “Banking Act”), the Federal Deposit Insurance Act, as
amended (the “FDIA”), and the FDIC regulations. In general terms, the Banking Act provides that when the expenditures of a bank
are greater than its receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and
the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such
balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Banking Act provides that
until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare
any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is
undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a
bank.
The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of
adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to
engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the
payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such
practice. The Federal Reserve Board has a policy statement that provides that an insured bank or bank holding company should not
maintain its existing rate of cash dividends on common stock unless (i) the organization’s net income available to common
shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention
appears consistent with the organization’s capital needs, asset quality, and overall financial condition. In addition, all insured
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depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement
Act of 1991 (“FDICIA”).
Federal Home Loan Bank System
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing
Finance Agency. The FHLB serves as a credit facility for member institutions within their assigned regions. They are funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in
accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.
As a system member, the Bank is entitled to borrow from the FHLB of New York (the “FHLB-NY”) and is required to invest in
FHLB membership and activity-based stock. The Bank must purchase membership stock equal to the greater of $1,000 or 0.15% of
certain mortgage-related assets held by the Bank. The Bank is also required to purchase activity-based stock equal to 4.50% of
outstanding advances to the Bank by the FHLB. The Bank is in compliance with the membership and activity-based stock ownership
requirements described above. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a
portion of the Bank’s mortgage loan portfolio, certain other investments, and the capital stock of the FHLB held by the Bank. The
Bank is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding
advances.
Prompt Corrective Action Regulations
Pursuant to the Dodd-Frank Act, federal banking agencies adopted capital rules based on the framework of the Basel Committee on
Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”),
which became effective January 1, 2014 for advanced approaches banking organizations (i.e., those with consolidated assets greater
than $250 billion or consolidated on-balance sheet foreign exposures of at least $10 billion) and January 1, 2015 for all other covered
organizations (subject to certain phase-in periods through January 1, 2019) replaced their general risk-based capital rules, advanced
approaches rule, market risk rule, and leverage rules.
The Basel III capital rules provide certain changes to the prompt corrective action regulations adopted by the agencies under Section
38 of the FDIA, as amended by FDICIA. These regulations are designed to place restrictions on U.S. insured depository institutions if
their capital levels begin to show signs of weakness. The five capital categories established by the agencies under their prompt
corrective action framework are: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized”.
The Basel III capital rules expand such categories by introducing a common equity tier 1 capital requirement for all depository
institutions, revising the minimum risk-based capital ratios and, beginning in 2018, the proposed supplementary leverage requirement
for advanced approaches banking organizations. The common equity tier 1 capital ratio is a new minimum requirement designed to
ensure that banking organizations hold sufficient high-quality regulatory capital that is available to absorb losses on a going-concern
basis. Under such rules, an insured depository institution is:
(i) “well capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier 1 risk-based capital ratio of 8% or more, a common
equity tier 1 capital ratio of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is not subject to any written capital
order or directive;
(ii) “adequately capitalized,” if it has a total risk-based capital ratio of 8% or more, a tier 1 risk-based capital ratio of 6% or more, a
common equity tier 1 capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4% or more;
(iii) “undercapitalized,” if it has a total risk-based capital ratio that is less than 8%, a tier 1 risk-based ratio that is less than 6%, a
common equity tier 1 capital ratio that is less than 4.5%, or a tier 1 leverage capital ratio that is less than 4%;
(iv) “significantly undercapitalized,” if it has a total risk-based capital ratio that is less than 6%, a tier 1 risk-based capital ratio that is
less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1 leverage capital ratio that is less than 3%; and
(v) “critically undercapitalized,” if it has a ratio of tangible equity (defined as tier 1 capital plus non-tier 1 perpetual preferred stock) to
total assets that is equal to or less than 2%.
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The new capital rules also include a policy statement by the agencies that all banking organizations should maintain capital
commensurate with their risk profiles, which may entail holding capital significantly above the minimum requirements. They also
provide a reservation of authority permitting examiners to require that such organizations hold additional regulatory capital.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying
any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s
holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the
time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal
banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”)
merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund,
and increased the maximum amount of the insurance coverage for certain retirement accounts, and possible “inflation adjustments” in
the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment
credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund. As a result of the merger of the BIF and
the SAIF, all insured institutions are subject to the same assessment rate schedule.
The Dodd-Frank Act contains several important deposit insurance reforms, including the following: (i) the maximum deposit
insurance amount was permanently increased to $250,000; (ii) the deposit insurance assessment is now based on the insured
depository institution’s average consolidated assets minus its average tangible equity, rather than on its deposit base; (iii) the
minimum reserve ratio for the Deposit Insurance Fund was raised from 1.15% to 1.35% of estimated insured deposits by
September 30, 2020; (iv) the FDIC is required to “offset the effect” of increased assessments on insured depository institutions with
total consolidated assets of less than $10 billion; (v) the FDIC is no longer required to pay dividends if the Deposit Insurance Fund’s
reserve ratio is greater than the minimum ratio; and (vi) the FDIC temporarily insured the full amount of qualifying “noninterest-
bearing transaction accounts” until December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing transaction
account” is a deposit or account maintained at a depository institution with respect to which interest is neither accrued nor paid, on
which the depositor or account holder is permitted to make withdrawals by negotiable or transferrable instrument, payment orders of
withdrawals, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to
third parties or others, and on which the insured depository institution does not reserve the right to require advance notice of an
intended withdrawal.
The FDIC amended its regulations under the FDIA, as amended by the Dodd-Frank Act, to modify the definition of a depository
institution’s insurance assessment base; to revise the deposit insurance assessment rate schedules in light of the new assessment base
and altered adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to revise the large insured depository
institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the
FDIC may incur. Since the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the new
assessment rates adopted by the FDIC are lower than the former rates.
In 2016, the FDIC adopted two new rules to require large institutions to bear the burden of raising the reserve ratio from 1.15% to
1.35% and amended the pricing for small institutions after the reserve ratio reaches 1.15%. Once the reserve ratio reaches 1.38%,
small institutions will receive credits to offset their contribution to raising the reserve ratio above 1.35%. Effective June 30, 2016, the
reserve ratio reached 1.15%, and assessment collections decreased for small institutions like the Bank. Furthermore, on September 30,
2018, the reserve ratio reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30,
2020 deadline required under the Dodd-Frank Act, and small institutions like the Bank were awarded assessment credits for the
portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, which will be applied when the
reserve ratio is at least 1.38%.
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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, 2018, the Bank is a well capitalized institution and is
therefore not subject to these limitations on brokered deposits.
However, under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which amended the FDIA,
reciprocal deposits are excluded from such limitations if the total reciprocal deposits of the institution do not exceed 20% of its total
liabilities. Reciprocal deposits are deposits that banks make with each other in equal amounts.
Regulatory Capital Requirements
Under the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital
requirements, on a consolidated basis, for insured institutions, depository institution holding companies, and non-bank financial
companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined
based on the minimum ratios established for insured depository institutions under prompt corrective action regulations. In effect, such
provision of the Dodd-Frank Act, which is commonly known as the Collins Amendment, applies to bank holding companies the same
leverage and risk-based capital requirements that apply to insured depository institutions. Because the capital requirements must be the
same for insured depository institutions and their holding companies, the Collins Amendment generally excludes certain debt or equity
instruments, such as cumulative perpetual preferred stock and trust preferred securities, from Tier 1 Capital, subject to a three-year
phase-out from Tier 1 qualification for such instruments issued before May 19, 2010, which phase-out commenced on January 1, 2014
for advanced approaches banking organizations and January 1, 2015 for other bank holding companies with consolidated assets of $15
billion or more as of December 31, 2009. However, such instruments issued before May 19, 2010 by a bank holding company, such as
Oriental, with total consolidated assets of less than $15 billion as of December 31, 2009, are not affected by the Collins Amendments,
are “grandfathered” under the new capital rules, and may continue to be included in tier 1 Capital as a restricted core capital element.
The Basel III capital rules adopted by the federal banking agencies revise the agencies’ risk-based and leverage capital requirements
for banking organizations and consolidate three separate notices of proposed rulemaking that the OCC, Federal Reserve Board and
FDIC published in the Federal Register on August 30, 2012, with selected changes. In particular, and consistent with the Basel III
framework, the capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common
equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that apply to all banking organizations. The rules also raise
the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking
organizations. In addition, for the largest, most internationally active banking organizations, the rules include a new minimum
supplementary leverage ratio that takes into account off-balance sheet exposures. The rules incorporate these new requirements into
the agencies’ prompt corrective action framework. In addition, the rules establish limits on a banking organization’s capital
distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity
tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. Further, the rules amend the
methodologies for determining risk-weighted assets for all banking organizations; introduce disclosure requirements that would apply
to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets; and adopt changes to the
agencies’ regulatory capital requirements that meet the requirements of Section 171 and Section 939A of the Dodd-Frank Act. These
rules also codify the agencies’ capital rules, which have previously resided in various appendices to their respective regulations, into a
harmonized integrated regulatory framework.
Under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, federal banking agencies must develop a
Community Bank Leverage Ratio (i.e., the ratio of a bank’s equity capital to its average total consolidated assets) for banks with assets
of less than $10 billion. Such banks that exceed this ratio will generally be deemed to in compliance with all other capital and
leverage requirements. On November 21, 2018, the federal banking agencies issued a proposal to simplify regulatory capital
requirements for qualifying community banking organizations, as required by this law.
Failure to meet the capital rules could subject an institution to a variety of enforcement actions including the termination of deposit
insurance by the FDIC and to certain restrictions on its business. At December 31, 2018, Oriental was in compliance with all
applicable capital requirements. For more information, please refer to the accompanying consolidated financial statements.
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Safety and Soundness Standards
Section 39 of the FDIA, as amended by FDICIA, requires each federal banking agency to prescribe for all insured depository
institutions standards relating to internal control, information systems, and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and such other operational and managerial
standards as the agency deems appropriate. In addition, each federal banking agency is also required to adopt for all insured depository
institutions standards relating to asset quality, earnings and stock valuation that the agency determines to be appropriate. Finally, each
federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of
executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit
compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an
institution fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a
plan specifying the steps that will be taken to cure the deficiency. If the institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the institution to correct the deficiency and, until it is
corrected, may impose other restrictions on the institution, including any of the restrictions applicable under the prompt corrective
action provisions of FDICIA.
The FDIC and the other federal banking agencies have adopted Interagency Guidelines Establishing Standards for Safety and
Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems,
loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation.
Activities and Investments of Insured State-Chartered Banks
Section 24 of the FDIA, as amended by FDICIA, generally limits the activities and equity investments of FDIC-insured, state-
chartered banks to those that are permissible for national banks. Under FDIC regulations of equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary engaged in permissible activities, (ii) investing as a limited partner in a partnership, or as a non-
controlling interest holder of a limited liability company, the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that such investments may not exceed 2% of the bank’s
total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and
officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and
(iv) acquiring or retaining the voting stock of an insured depository institution if certain requirements are met, including that it is
owned exclusively by other banks. Under the FDIC regulations governing the activities and investments of insured state banks which
further implemented Section 24 of the FDIA, as amended by FDICIA, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined
that such activities would pose no risk to the Deposit Insurance Fund and the bank is in compliance with applicable regulatory capital
requirements.
Transactions with Affiliates and Related Parties
Transactions between the Bank and any of its affiliates are governed by sections 23A and 23B of the Federal Reserve Act. These
sections are important statutory provisions designed to protect a depository institution from transferring to its affiliates the subsidy
arising from the institution’s access to the Federal safety net. An affiliate of a bank is any company or entity that controls, is controlled
by, or is under common control with the bank, including investment funds for which the bank or any of its affiliates is an investment
advisor. Generally, sections 23A and 23B (i) limit the extent to which a bank or its subsidiaries may engage in “covered transactions”
with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms that are consistent
with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in
securities issued by the affiliate, purchase of assets, acceptance of securities issued by the affiliate as collateral for a loan or extension
of credit, issuance of guarantees and other similar types of transactions. The Dodd-Frank Act expanded the scope of transactions
treated as “covered transactions” to include credit exposure to an affiliate on derivatives transactions, credit exposure resulting from a
securities borrowing or lending transaction, or derivative transaction, and acceptances of affiliate-issued debt obligations as collateral
for a loan or extension of credit. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from
100% to 130% of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an
affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as
favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Regulation W of the
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Federal Reserve Board comprehensively implements sections 23A and 23B. The regulation unified and updated staff interpretations
issued over the years prior to its adoption, incorporated several interpretative proposals (such as to clarify when transactions with an
unrelated third party will be attributed to an affiliate), and addressed issues arising as a result of the expanded scope of non-banking
activities engaged in by banks and bank holding companies and authorized for financial holding companies under the Gramm-Leach-
Bliley Act.
Sections 22(g) and 22(h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal
shareholders. Regulation O of the Federal Reserve Board implements these provisions. Under Section 22(h) and Regulation O, loans
to a director, an executive officer and a greater-than-10% shareholder of a bank and certain of their related interests (collectively
“insiders”), and insiders of its affiliates, may not exceed, together with all other outstanding loans to such person and its related
interests, the bank’s single borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h)
and Regulation O also require that loans to insiders and insiders of affiliates be made on terms substantially the same as offered in
comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely
available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) and
Regulation O also require prior board of directors’ approval for certain loans, and the aggregate amount of extensions of credit by a
bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) and Regulation O place
additional restrictions on loans to executive officers.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with
its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess
the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. Oriental has a
Compliance Department that oversees the planning of products and services offered to the community, especially those aimed to serve
low and moderate income communities.
USA Patriot Act
Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, all financial institutions, including Oriental, Oriental Financial Services, and the Bank, are required in general to identify
their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain
transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their
customers and their transactions.
The U.S. Treasury Department (the “US Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply
certain of its requirements to financial institutions. The regulations impose obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal consequences for the
institution. Oriental and its subsidiaries, including the Bank, have adopted policies, procedures and controls to address compliance
with the USA Patriot Act under existing regulations, and will continue to revise and update their policies, procedures and controls to
reflect changes required by the USA Patriot Act and the US Treasury’s regulations.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic
customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data
from unauthorized access. Oriental and its subsidiaries have established policies and procedures to assure Oriental’s compliance with
all privacy provisions of the Gramm-Leach-Bliley Act.
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a range of corporate governance and accounting measures to increase
corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and
to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. In addition, SOX established
membership requirements and responsibilities for the audit committee, imposed restrictions on the relationship between Oriental and
external auditors, imposed additional responsibilities for the external financial statements on the chief executive officer and the chief
financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate its disclosure controls
and procedures and its internal control over financial reporting, and required the auditors to issue a report on the internal control over
financial reporting.
Oriental has included in this annual report on Form 10-K management’s assessment regarding the effectiveness of Oriental’s internal
control over financial reporting. The internal control report includes a statement of management’s responsibility for establishing and
maintaining adequate internal control over financial reporting for Oriental; management’s assessment as to the effectiveness of
Oriental’s internal control over financial reporting based on management’s evaluation as of year-end; and the framework used by
management as criteria for evaluating the effectiveness of Oriental’s internal control over financial reporting. As of December 31,
2018 Oriental’s management concluded that its internal control over financial reporting was effective.
Puerto Rico Banking Act
As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the OCFI under the Banking Act,
which contains provisions governing the 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, 2018 and 2017, legal surplus
amounted to $90.2 million and $81.5 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.
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The Puerto Rico Finance Board is composed of the Commissioner of Financial Institutions of Puerto Rico; the Executive Director of
the Puerto Rico Fiscal Agency and Finance Advisory Authority: the Presidents of the Economic Development Bank for Puerto Rico
and the Puerto Rico Planning Board; the Secretaries of Commerce and Economic Development, Treasury and Consumer Affairs of
Puerto Rico; the Commissioner of Insurance of Puerto Rico; and the President of the Public Corporation for Insurance and
Supervision of Puerto Rico Cooperatives. It has the authority to regulate the maximum interest rates and finance charges that may be
charged on loans to individuals and businesses in the Commonwealth. The current regulations of the Puerto Rico Finance Board
provide that the applicable interest rate on loans to individuals and businesses is to be determined by free competition. The Puerto
Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card
purchases. There is presently no maximum rate for retail installment sales contracts and for credit card purchases.
Puerto Rico Internal Revenue Code
Under the Puerto Rico Internal Revenue Code of 2011, as amended (the "PR Code”), a corporation pays taxes at a fixed rate of 18.5%
(the regular corporate tax) plus a surtax that ranges from 5% for net income subject to surtax in excess of $75,000 to 19% for net
income subject to surtax in excess of $275,000. Net income subject to surtax is net income less $25,000. The maximum regular
corporate tax decreased to 18.5% for tax years beginning after December 31, 2018. The result is a maximum combined rate of 37.5%
(previously the maximum combined rate was 39%) under the PR Code for years beginning after December 31, 2018. The Bank and
other subsidiaries of Oriental are treated as separate taxable corporations and are not entitled to file consolidated returns. The PR
Code also provides a dividends-received deduction of 100% on dividends received from "controlled subsidiaries" subject to taxation in
Puerto Rico and 85% on dividends received from other taxable domestic corporations.
Act No. 77 of 2014 amended the PR Code to increase the Puerto Rico capital gains tax rate from 15% to 20%, and for an asset to be
considered long term capital asset, the holding period must be over a year, which before the enactment of this law was defined as
having a holding period of over six months. The PR Code was also amended by Act No. 72 of 2015. The most relevant provisions of
the Act 72, as applicable to Oriental, for taxable years beginning after December 31, 2014, are as follows: (i) a new definition of
“large taxpayers,” which require them to file their tax return following a special procedure established by the Secretary of the Treasury
of Puerto Rico, (ii) net operating losses carried forward may be deducted up to 70% of the alternative minimum net income for
purposes of computing the alternative minimum tax, and (iii) net operating losses carried forward may be deducted up to 80% of the
net income for purposes of computing the regular corporate income tax. Other amendments to the PR Code, for example, include an
increase of the sales and use tax ("SUT") from 7% to 11.5%, effective July 1, 2015, and a special 4% SUT for certain business
services previously exempted from the SUT, effective October 1, 2015. On December 2018, the Puerto Rico government enacted Act
257-2018 which, among other changes, (i) reduced the maximum corporate income tax rate to 37.5%, from 39%, (ii) increased the net
operating losses deduction and carry forward deduction to 90% of taxable income, previously 80%, (iii) included a restriction of the
use of partnership gains to offset current and accumulated operating losses generated by a corporate partner, (iv) required that the
corporate income tax returns of “large taxpayers” be certified as prepared or reviewed by a Puerto Rico licensed certified public
accountant, (v) increased the limitation on the partnership or special partnership loss deduction to 90% (from 80%) of the aggregate
net income of partnerships or special partnerships, (vi) increased the limitation of capital losses carryover to 90% (previously 80%) of
capital gains for the taxable year, and (vii) amended the formula to compute the alternative minimum tax (“AMT”), which now would
be the greater of $500 or 23% of the AMT taxable income (previously 30%).
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
generally limited to persons and assets/liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must
have not less than $300 thousand of unencumbered assets or acceptable financial guarantees in Puerto Rico.
Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBE Unit and IBE Subsidiary have to maintain in Puerto Rico the books
and records of all their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of
their financial condition and results of operations to the OCFI, including annual audited financial statements.
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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 bank holding companies, insured depository institutions and their affiliates from (i) engaging in short-term proprietary
trading of securities, derivatives, commodities futures and options on these instruments for their own account; and (ii) owning,
sponsoring or having certain relationships with hedge funds or private equity funds. However, it exempts certain activities, including
market making, underwriting, hedging, trading in government and municipal obligations, and organizing and offering a hedge fund or
private equity fund, among others. A banking entity that engages in any such covered activity (i.e., proprietary trading or investment
activities in hedge funds or private equity funds) is generally required to establish an internal compliance program reasonably
designed to ensure and monitor compliance with the Volcker Rule.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 amended the BHC Act to exempt from the Volcker
Rule those bank holding companies, insured depository institutions and their affiliates with total assets that do not exceed $10 billion
and trading assets and liabilities comprising not more than 5% of their total assets. Therefore, banking entities that meet such
threshold may generally engage in proprietary trading and invest in private equity and hedge funds. On December 21, 2018, the
federal banking agencies proposed rules to implement such exemption.
Employees
At December 31, 2018, Oriental had 1,392 employees. None of its employees is represented by a collective bargaining group. Oriental
considers its employee relations to be good.
Internet Access to Reports
Oriental’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any and all amendments to
such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge
on or through the “SEC filings” link of Oriental’s internet website at www.ofgbancorp.com, as soon as reasonably practicable after
Oriental electronically files such material with, or furnishes it to, the SEC.
Oriental’s corporate governance principles and guidelines, code of business conduct and ethics, and the charters of its audit
committee, compensation committee, risk and compliance committee, and corporate governance and nominating committee are
available free of charge on Oriental’s website at www.ofgbancorp.com under the corporate governance link. Oriental’s code of
business conduct and ethics applies to its directors, officers, employees and agents, including its principal executive, financial and
accounting officers.
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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 Oriental makes with the SEC under the Securities Exchange Act of 1934. Additional risks and uncertainties not presently
known to us at this time or that Oriental currently deems immaterial may also adversely affect Oriental’s business, financial condition
or results of operations.
ECONOMIC AND MARKET CONDITIONS RISK
Most of our business is conducted in Puerto Rico, which economic and government fiscal and liquidity challenges, as well as the
impact of two major hurricanes during 2017, have adversely impacted and may continue to adversely impact us.
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.
Puerto Rico entered recession in the fourth quarter of fiscal year 2006 and its gross national product (GNP) thereafter contracted in
real terms every year between fiscal years 2007 and 2017 (inclusive), except fiscal year 2012. Real GNP is projected to have further
contracted by approximately 5.6% in fiscal year 2018 according to the latest Puerto Rico Planning Board (the “Planning Board”)
estimates, exacerbated by the impact of hurricanes Irma and María in September 2017. The Planning Board estimates a 3.5% increase
in GNP in fiscal year 2019, in part due to the influx of federal funds and private insurance payments following the impact of the
hurricanes. Hurricane Irma and Maria caused extensive destruction in Puerto Rico, disrupting the primary market in which Oriental
does business. The damage caused by the hurricanes was substantial and had a material adverse impact on economic activity in Puerto
Rico.
The Commonwealth’s fiscal and economic crisis prompted the U.S. Congress to enact the Puerto Rico Oversight, Management and
Economic Stability Act (“PROMESA”) in June 2016. PROMESA, among other things, established a seven-member federally-
appointed oversight board (the “Oversight Board”) with broad powers over the finances of the Commonwealth and its
instrumentalities and provided to the Commonwealth, its public corporations and municipalities, broad-based restructuring authority,
including through a bankruptcy-type process similar to that of Chapter 9 of the U.S. Bankruptcy Code. In August 2016, President
Obama appointed the seven voting members of the Oversight Board through the process established in PROMESA, which authorized
the President to select the members from several lists required to be submitted by congressional leaders. On February 15, 2019,
however, the First Circuit of the U.S. Court of Appeals (the “First Circuit”) declared such appointments unconstitutional on the
grounds that they did not comply with the Appointments Clause of the U.S. Constitution, which requires that principal federal officers
be appointed by the President, with the advice and consent of the U.S. Senate. The First Circuit’s decision provides that its mandate
will not issue for 90 days, so as to allow the President and the U.S. Senate to validate the currently defective appointments or
reconstitute the Oversight Board in accordance with the Appointments Clause. Such process may delay the Commonwealth’s efforts
to restructure its debts and create additional uncertainty regarding the Commonwealth’s prospects for fiscal and economic recovery.
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.”
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Puerto Rico is susceptible to hurricanes and major storms, which could further deteriorate Puerto Rico’s economy and
infrastructure.
Our branch network and most of our business is concentrated in Puerto Rico, which is susceptible to hurricanes and major storms that
affect the local economy and the demand for our loans and financial services, as well as the ability of our customers to repay their
loans. Any such natural disasters may further adversely affect Puerto Rico’s critical infrastructure, which is generally weak. This
makes us vulnerable to downturns in Puerto Rico’s economy as a result of natural disasters, such as hurricanes Irma and Maria. Any
subsequent hurricanes, major storms or similar natural disasters could further deteriorate Puerto Rico’s economy and infrastructure
and negatively affect or disrupt our operations and customer base.
Changes in interest rates could reduce Oriental’s net interest income
Market risk refers to the probability of variations in the net interest income or the fair value of assets and liabilities due to changes in
interest rates, currency exchange rates or equity prices.
Changes in interest rates are one of the principal market risks affecting us. Our earnings are dependent to a large degree on net interest
income, which is the difference between the interest rates earned on interest-earning assets, such as loans and investment securities,
and the interest rates paid on interest-bearing liabilities, such as deposits and borrowings. Depending on the duration and repricing
characteristics of the assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level
of net interest income. For any given period, the pricing structure of the assets and liabilities is matched when an equal amount of such
assets and liabilities mature or reprice in that period. Like all financial institutions, our financial position is affected by fluctuations in
interest rates. Volatility in interest rates can also result in the flow of funds away from financial institutions. We may suffer losses or
experience lower spreads than anticipated if we are not effective in managing our interest rate risk.
CREDIT RISK
We are exposed to credit risk in connection with our loans to certain municipalities of Puerto Rico, and the restructuring of the
government could adversely affect the value of such loans.
At December 31, 2018, we had approximately $135.9 million of credit exposure to four Puerto Rico municipalities. This credit
exposure consists of collateralized loans or obligations that have special additional property tax revenues pledged for their repayment.
The Puerto Rico government faces a number of severe economic and fiscal challenges that are expected to require a significant
government restructuring, as well as severe austerity measures to close its significant budget deficit.
If the government restructuring affects the ability of the municipalities to pay their obligations to us as they become due, or under
certain other circumstances, we may be required to adversely classify such loans and increase the provision for loan losses in
connection therewith. Such provision may significantly impact our earnings.
Heightened credit risk could require us to increase our provision for credit losses, which could have a material adverse effect on
our results of operations and financial condition.
Making loans is an essential element of our business, and there is a risk that the loans will not be repaid. This default risk is affected
by a number of factors, including:
•
•
•
•
the duration of the loan;
credit risks of a particular borrower;
changes in economic or industry conditions; and
in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.
Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might
be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially
adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment
of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an
evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may
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not be enough to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the
allowance would materially decrease our net income.
Our emphasis on the origination of business and retail loans is one of the more significant factors in evaluating our allowance for loan
losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and
as a result would decrease our earnings.
We strive to maintain an appropriate allowance for loan and lease losses to provide for probable losses inherent in the loan portfolio.
We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal
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 economic conditions in Puerto Rico, we may continue to experience increased credit costs or need to take greater than
anticipated markdowns and make greater than anticipated provisions to increase the allowances for loan losses that could adversely
affect our financial condition and results of operations in the future.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan
charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a
materially adverse effect on our results of operations and/or financial condition.
We are subject to default and other risks in connection with mortgage loan originations.
From the time that we fund the mortgage loans originated to the time that they are sold, we are generally at risk for any mortgage loan
defaults. Once we sell the mortgage loans, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or
insurer of the mortgage loans. However, in the ordinary course of business, we make representations and warranties to the purchasers
and insurers of mortgage loans relating to the validity of such loans. If there is a breach of any of these representations or warranties,
we may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. We also may be required to
repurchase mortgage loans in the event that there was improper underwriting or fraud or in the event that the loans become delinquent
shortly after they are originated. For the year ended December 31, 2018, we repurchased $7.7 million of loans from GNMA and
FNMA. Any such repurchases in the future may negatively impact our liquidity and operating results. Termination of our ability to
sell mortgage products to U.S government-sponsored entities would have a material adverse effect on our results of operations and
financial condition. In addition, we may be required to indemnify certain purchasers and others against losses they incur in the event
of breaches of our representations and warranties and in various other circumstances, including securities fraud claims, and the amount
of such losses could exceed the purchase amount of the related loans. Consequently, we may be exposed to credit risk associated with
sold loans. In addition, we incur higher liquidity risk with respect to mortgage loans not eligible to be purchased or insured by FNMA,
GNMA or FHLMC, due to a lack of secondary market in which to sell these loans.
We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable and
reasonably estimable related to the mortgage loans sold by us. The adequacy of the reserve and the ultimate amount of losses incurred
will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and
indemnification requests, the actual success rate of claimants, developments in litigation related to us and the industry, actual
recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). Due to uncertainties
relating to these factors, there can be no assurance that our reserves will be adequate or that the total amount of losses incurred will not
have a material adverse effect upon our financial condition or results of operations. For additional information related to our allowance
for loan and lease losses, see “Note 7—Allowance for Loan and Lease Losses” to our consolidated financial statements included in
this annual report on Form 10-K.
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A continuing decline in the real estate market would likely result in an increase in delinquencies, defaults and foreclosures and in
a reduction in loan origination activity, which would adversely affect our financial results.
The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability
followed by periods of lower volumes and industry-wide losses. The market for residential mortgage loan originations in Puerto Rico
is currently in decline, and this trend could also reduce the level of mortgage loans that we may originate in the future and may
adversely impact our business. During periods of rising interest rates, refinancing originations for many mortgage products tend to
decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential
mortgage loan origination business is impacted by home values. A significant trend of decreasing values in several housing segments
in Puerto Rico continues to be experienced. There is a risk that a reduction in housing values could negatively impact our loss levels
on the mortgage loan portfolio because the value of the homes underlying the loans is a primary source of repayment in the event of
foreclosure.
The decline in Puerto Rico’s economy has had an adverse effect in the credit quality of our loan portfolios. Among other things,
during the ongoing recession, we have experienced an increase in the level of non-performing assets and loan loss provision, which
adversely affected our profitability. Although the delinquency rates have decreased recently, due in part to our 2017 optional and
temporary moratorium on most retail loans and some commercial loan, they may increase if the recession continues or worsens. If
there is another decline in economic activity, additional increases in the allowance for loan and lease losses could be necessary with
further adverse effects on our profitability.
Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell loans, the price received on the
sale of such loans, and the value of the mortgage loan portfolio, all of which could have a negative impact on our results of operations
and financial condition. In addition, any material decline in real estate values would weaken our collateral loan-to-value ratios and
increase the possibility of loss if a borrower default. For a discussion of the impact of the Puerto Rico economy on our business
operations, see “Most of our business is conducted in Puerto Rico, which is experiencing a deep economic recession, a downturn in
the real estate market, and a government fiscal and liquidity crisis.”
OPERATIONS AND BUSINESS RISK
Non-Compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines and other sanctions.
Financial institutions are generally required under the USA Patriot Act and the Bank Secrecy Act to develop programs to prevent such
financial institutions from being used for money-laundering and terrorist financing activities. Financial institutions are generally also
required to file suspicious activity reports with the Financial Crimes Enforcement Network of the U.S. Treasury Department if such
activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity
of customers seeking to open new financial accounts. We have developed a compliance program reasonably designed to ensure
compliance with such laws and regulations. Our failure or the inability to comply with these regulations could result in enforcement
actions, fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators, costly litigation, or
expensive additional internal controls and systems.
We are subject to security and operational risks related to our use of technology, including the risk of cyber-attack or cyber theft.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and
networks regarding our customers and their accounts. To provide these products and services, we use information systems and
infrastructure that we and third-party service providers operate. As a financial institution, we also are subject to and examined for
compliance with an array of data protection laws, regulations and guidance, as well as to our own internal privacy and information
security policies and programs.
Such incidents may include unauthorized access to our digital systems for purposes of misappropriation of assets, gaining access to
sensitive information, corrupting data, or causing operational disruption. Although our information technology structure continues to
be subject to cyber attacks, we have not, to our knowledge, experience a breach of cyber-security. Such an event could compromise
our confidential information, as well as that of our customers and third parties with whom we interact with and may result in negative
consequences.
While we have policies and procedures designated to prevent or limit the effects of a possible security breach of our information
systems, if unauthorized persons were somehow to get access to confidential information in our possession or to our proprietary
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information, it could result in significant legal and financial exposure, damage to our reputation or a loss of confidence in the security
of our systems that could adversely affect our business. Though we have insurance against some cyber-risks and attacks, it may not be
sufficient to offset the impact of a material loss event.
We rely on third parties to provide services and systems essential to the operation of our business, and any failure, interruption or
termination of such services or systems could have a material adverse affect on our financial condition and results of operations.
Our business relies on the secure, successful and uninterrupted functioning of our core banking platform, information technology,
telecommunications, and loan servicing. We outsource some of our major systems, such as customer data and deposit processing, part
of our mortgage loan servicing, internet and mobile banking, and electronic fund transfer systems. The failure or interruption of such
systems, or the termination of a third-party software license or any service agreement on which any of these systems or services is
based, could interrupt our operations. Because our information technology and telecommunications systems interface with and
depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such systems fail
or experience interruptions. In addition, replacing third party service providers could also entail significant delay and expense.
If sustained or repeated, a failure, denial or termination of such systems or services could result in a deterioration of our ability to
process new loans, service existing loans, gather deposits and/or provide customer service. It could also compromise our ability to
operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and
possible financial liability. Any of the foregoing could have a material adverse effect on our financial condition and results of
operations.
Our risk management policies, procedures and systems may be inadequate to mitigate all risks inherent in our various businesses.
A comprehensive risk management function is essential to the financial and operational success of our business. The types of risk we
monitor and seek to manage include, but are not limited to, operational, technological, organizational, market, fiduciary, legal,
compliance, liquidity and credit risks. We have adopted various policies, procedures and systems to monitor and manage these risks.
There can be no assurance that those policies, procedures and systems are adequate to identify and mitigate all risks inherent in our
various businesses. Our businesses and the markets in which we operate are also continuously evolving. If we fail to fully understand
the implications of changes in our business or the financial markets and to adequately or timely enhance the risk framework to address
those changes, we could incur losses. In addition, in a difficult or less liquid market environment, our risk management strategies may
not be effective because other market participants may be attempting to use the same or similar strategies to deal with the challenging
market conditions. In such circumstances, it may be difficult for us to reduce our risk positions due to the activity of such other market
participants.
LIQUIDITY RISK
Our business could be adversely affected if we cannot maintain access to stable funding sources.
Our business requires continuous access to various funding sources. We are able to fund our operations through deposits as well as
through advances from the FHLB-NY and FRB-NY; however, our business is significantly dependent upon other wholesale funding
sources, such as repurchase agreements and brokered deposits, which consisted of approximately 22% of our total interest-bearing
liabilities as of December 31, 2018.
Brokered deposits are typically sold through an intermediary to small retail investors. Our ability to continue to attract brokered
deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, our
credit rating and the relative interest rates that we are prepared to pay for these liabilities. Brokered deposits are generally considered a
less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally
more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in
interest rates offered on deposits.
We expect to have continued access to credit from the foregoing sources of funds. However, there can be no assurance that such
financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption, or if
negative developments occur with respect to us, the availability and cost of funding sources could be adversely affected. In that event,
our cost of funds may increase, thereby reducing the net interest income, or we may need to dispose of a portion of the investment
portfolio, which, depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting
consequences upon such dispositions. The interest rates that we pay on our securities are also influenced by, among other things,
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applicable credit ratings from recognized rating agencies. A downgrade to any of these credit ratings could affect our ability to access
the capital markets, increase our borrowing costs and have a negative impact on our results of operations. Our efforts to monitor and
manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other
reductions in liquidity driven by us or market-related events. In the event that such sources of funds are reduced or eliminated, and we
are not able to replace them on a cost-effective basis, we may be forced to curtail or cease our loan origination business and treasury
activities, which would have a material adverse effect on our operations and financial condition.
Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends.
We are a separate and distinct legal entity from our subsidiaries. Dividends to us from our subsidiaries have represented a major
source of funds for us to pay dividends on our common and preferred stock, make payments on corporate debt securities and meet
other obligations. There are various U.S. federal and Puerto Rico law limitations on the extent to which Oriental Bank, our main
subsidiary, can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory
capital requirements, U.S. federal and Puerto Rico banking law requirements concerning the payment of dividends out of net profits or
surplus, Sections 23A and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Board governing transactions
between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound
practices. Further, under the Basel III capital rules adopted by the federal banking regulatory agencies, a banking organization will
need to hold a capital conservation buffer (composed of common equity tier 1 capital) greater than 2.5% of total risk-weighted assets
to avoid limitations on capital distributions and discretionary bonus payments. Compliance with the capital conservation buffer is
determined as of the end of the calendar quarter prior to any such capital distribution or discretionary bonus payment and is subject to
a three-year transition period beginning in 2016.
If our subsidiaries’ earnings are not sufficient to make dividend payments while maintaining adequate capital levels, our liquidity may
be affected, and we may not be able to make dividend payments to our holders of common and preferred stock or payments on
outstanding corporate debt securities or meet other obligations, each of which could have a material adverse impact on our results of
operations, financial position or perception of financial health.
In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.
COMPETITIVE AND STRATEGIC RISK
Competition with other financial institutions could adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits and assets to manage. The competition in originating
loans and attracting assets comes principally from other U.S., Puerto Rico and foreign banks, investment advisors, securities broker-
dealers, mortgage banking companies, consumer finance companies, credit unions, insurance companies, and other institutional
lenders and purchasers of loans. We will encounter greater competition as we expand our operations. Increased competition may
require us to increase the rates paid on deposits or lower the rates charged on loans which could adversely affect our profitability.
We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.
Our operations are subject to extensive regulation by federal and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on all or part of our operations. Because our business is
highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the
Dodd-Frank Act has a broad impact on the financial services industry, including significant regulatory and compliance changes, as
discussed under the subheading “Dodd-Frank Wall Street Reform and Consumer Protection Act” in Item 1of this annual report. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our
business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our
business.
We may be required to invest significant management attention and resources to evaluate and make necessary changes in order to
comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the
laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.
20
Competition in attracting talented people could adversely affect our operations.
We depend on our ability to attract and retain key personnel and we rely heavily on our management team. The inability to recruit and
retain key personnel or the unexpected loss of key managers may adversely affect our operations. Our success to date has been
influenced strongly by the ability to attract and retain senior management experienced in banking and financial services. Retention of
senior managers and appropriate succession planning will continue to be critical to the successful implementation of our strategies.
Reputational risk and social factors may impact our results.
Our ability to originate loans and to attract deposits and assets is highly dependent upon the perceptions of consumer, commercial and
funding markets of our business practices and our financial health. Negative public opinion could result from actual or alleged conduct
in any number of activities or circumstances, including lending practices, regulatory compliance, inadequate protection of customer
information, or sales and marketing, and from actions taken by regulators in response to such conduct. Adverse perceptions regarding
us could lead to difficulties in originating loans and generating and maintaining accounts as well as in financing them.
In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the
rate of defaults by account holders and borrowers. If consumers develop or maintain negative attitudes about incurring debt, or if
consumption trends decline, our business and financial results will be negatively affected.
ACCOUNTING AND TAX RISK
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies
may adversely affect our financial statements.
Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. Accordingly, from
time to time we are required to adopt new or revised accounting standards issued by FASB. Market conditions have prompted
accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related
to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. See “Note 1—Summary of
Significant Accounting Policies” to our consolidated financial statements included herein for a discussion of any accounting
developments that have been issued but not yet implemented. An assessment of proposed standards is not provided as such proposals
are subject to change through the exposure process and, therefore, the effects on our consolidated financial statements cannot be
meaningfully assessed. It is possible that future accounting standards that we are required to adopt could change the current
accounting treatment that applies to the consolidated financial statements and that such changes could have a material effect on our
financial condition and results of operations.
Our goodwill and other intangible assets could be determined to be impaired in the future and could decrease Oriental’s earnings.
We are required to test our goodwill, core deposit and customer relationship intangible assets for impairment on a periodic basis. The
impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net
present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository
institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible
assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the
tangible book value of our common shares or our regulatory capital levels, but such an impairment loss could significantly restrict
Oriental’s ability to make dividend payments without prior regulatory approval.
Based on our annual goodwill impairment test, we determined that no impairment charges were necessary. As of December 31, 2018,
we had on our consolidated balance sheet $86.1 million of goodwill in connection with the BBVAPR Acquisition and the FDIC-
assisted Eurobank acquisition, $2.5 million of core deposit intangible in connection with the FDIC-assisted Eurobank acquisition and
the BBVAPR Acquisition, and $0.9 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.
21
Legislative and other measures that may be taken by Puerto Rico governmental authorities could materially increase our tax
burden or otherwise adversely affect our financial condition, results of operations or cash flows.
Legislative changes, particularly changes in tax laws, could adversely impact our results of operations. In an effort to address the
Commonwealth’s ongoing fiscal problems, the Puerto Rico government has enacted tax reforms in the past and is expected to do so in
the future. In 2014, the government of Puerto Rico approved an amendment to the PR Code, which, among other things, changed the
income tax rate for capital gains from 15% to 20%. In May 2015, the government approved an increase in the Puerto Rico sales and use
tax, effective July 1, 2015, from 7% to 11.5%, included a new 4% business to business tax and expanded the sales and use tax to certain
business services that were previously exempt. In addition, in December 2018, the Puerto Rico government enacted Act 257-2018,
which reduced the maximum corporate income tax rate from 39% to 37.5% included a restriction on the use of partnership gains to
offset current and accumulated operating losses generated by a corporate partner and amended the formula to compute the AMT, among
other changes, as described above under “Puerto Rico Internal Revenue Code,” Item 1. The recent change in tax rate resulted in a
reduction of our deferred tax assets, with a corresponding non-cash increase to income tax expense.
We operate the IBE Unit and IBE Subsidiary pursuant to the IBE Act which provides significant tax advantages. The IBEs have an
exemption from Puerto Rico income taxes on interest earned on, or gain realized from the sale of, non-Puerto Rico assets, including
U.S. government obligations and certain mortgage-backed securities. This exemption has allowed us to have an effective tax rate below
the maximum statutory tax rate. In the past, the Legislature of Puerto Rico has considered proposals to curb the tax benefits afforded to
IBEs. In 2012, a new Puerto Rico law was enacted in this area, although it did not repeal the IBE Act, the new law does not allow new
license applications under the IBE Act. Any newly organized “international financial entity” must be licensed under a new law and such
entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and IBE Subsidiary, which are
“grandfathered”) are generally subject to a 4% Puerto Rico income tax rate. In the event other legislation is enacted by the Puerto Rico
government to eliminate or modify the tax exemption provided to IBEs, the consequences could have a materially adverse impact on
our financial results, including an increase in income tax expense and consequently our effective tax rate, adversely affecting our
financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Oriental owns a fifteen-story office building located at 254 Muñoz Rivera Avenue, San Juan Puerto Rico, known as Oriental Center.
Oriental operates a full-service branch at the plaza level and our centralized units and subsidiaries occupy approximately 84% of the
office floor space. Approximately 3% of the office space is leased to outside tenants and 13% is available for lease.
The Bank owns five branch premises and leases thirty-two 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, 2018, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and
maintenance expenses payable by Oriental, was approximately $24.4 million.
Oriental’s investment in premises and equipment, exclusive of leasehold improvements at December 31, 2018, was $114.9 million,
gross of accumulated depreciation.
ITEM 3. LEGAL PROCEEDINGS
Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. Oriental is vigorously
contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the
opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on Oriental’s
financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
22
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. Information concerning the
range of high and low sales prices for Oriental’s common stock for each quarter in the years ended December 31, 2018 and 2017, as
well as cash dividends declared for such periods is set forth under the sub-heading “Stockholders’ Equity” in the “Analysis of Financial
Condition” caption in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
Information concerning legal or regulatory restrictions on the payment of dividends by Oriental and the Bank is contained under the
sub-heading “Dividend Restrictions” in Item 1 of this annual report.
As of December 31, 2018, Oriental had approximately 6,340 holders of record of its common stock, including all directors and officers
of Oriental, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees.
23
Stock Performance Graph
The graph below compares the percentage change in Oriental’s cumulative total stockholder return during the measurement period with
the cumulative total return, assuming reinvestment of dividends, of the Russell 2000 Index and the SNL Bank Index.
The cumulative total stockholder return was obtained by dividing (a) the sum of (i) the cumulative amount of dividends per share,
assuming dividend reinvestment, for the measurement period beginning December 31, 2013, and (ii) the difference between the share
price at the beginning and the end of the measurement period, by (b) the share price at the beginning of the measurement period.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Total Return Performance
OFG Bancorp
Russell 2000 Index
SNL Bank Index
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
OFG Bancorp
Russell 2000
SNL Bank
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
100.00
100.00
100.00
97.98
104.89
111.79
44.47
100.26
113.69
81.72
121.63
143.65
60.09
139.44
169.64
107.12
124.09
140.98
24
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under Item 7 and “Financial Statements and Supplementary Data” under Item 8 of this annual
report.
OFG Bancorp
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 2018, 2017, 2016, 2015, AND 2014
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and leases losses
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
Cash dividends declared per common share
Cash dividends declared on common shares
PERFORMANCE RATIOS:
Return on average assets (ROA)
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
2018
2017
Year Ended December 31,
2016
(In thousands, except per share data)
2015
2014
$
360,419 $
44,525
315,894
56,108
345,647 $
41,475
304,172
113,139
356,592 $
57,165
299,427
65,076
406,568 $
69,196
337,372
161,501
485,257
76,782
408,475
60,640
$
$
$
$
$
259,786
80,095
207,081
132,800
48,390
84,410
(12,024)
191,033
78,687
201,631
68,089
15,443
52,646
(13,862)
234,351
66,819
215,990
85,180
25,994
59,186
(13,862)
175,871
52,472
248,401
(20,058)
(17,554)
(2,504)
(13,862)
347,835
17,323
242,725
122,433
37,252
85,181
(13,862)
72,386 $
38,784 $
45,324 $
(16,366) $
71,319
1.59 $
1.52 $
0.88 $
0.88 $
1.03 $
1.03 $
(0.37) $
(0.37) $
45,400
43,939
43,913
51,455
51,349
0.25
11,511
51,096
0.24
10,553
51,088
0.24
10,544
44,231
0.36
15,932
1.58
1.50
45,024
52,326
0.34
15,286
1.31%
0.84%
0.88%
-0.03%
1.10%
9.95%
8.85%
15.19%
53.07%
5.19%
5.28%
5.64%
4.98%
15.27%
53.99%
5.15%
5.23%
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%
25
PERIOD END BALANCES AND CAPITAL
RATIOS:
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 (loss) 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
Tier 1 risk-based capital
Total risk-based capital
Financial assets managed
Trust assets managed
Broker-dealer assets gathered
Total assets managed
2018
2017
2016
(In thousands, except per share data)
2015
2014
December 31,
$
$
$
$
$
$
$
$
$
$
$
1,279,604 $
4,431,594
5,711,198 $
1,166,050 $
4,056,329
5,222,379 $
1,362,511 $
4,147,692
5,510,203 $
1,615,872 $
4,434,213
6,050,085 $
1,402,056
4,826,646
6,228,702
4,908,115 $
455,508
114,917
5,478,540 $
4,799,482 $
192,869
135,879
5,128,230 $
4,664,487 $
653,756
141,598
5,459,841 $
4,717,751 $
934,691
436,843
6,089,285 $
4,924,406
980,087
439,919
6,344,412
92,000 $
59,885
619,381
90,167
253,040
(103,633)
(10,963)
999,877 $
17.90 $
16.15 $
16.46 $
176,000 $
52,626
541,600
81,454
200,878
(104,502)
(2,949)
945,107 $
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 $
17.73 $
15.67 $
9.40 $
17.18 $
15.08 $
13.10 $
16.67 $
14.53 $
7.32 $
14.22%
13.92%
12.99%
11.18%
N/A
N/A
N/A
16.78%
19.20%
20.48%
14.59%
19.05%
20.34%
14.05%
18.35%
19.62%
N/A
12.14%
15.99%
17.29%
176,000
52,626
539,311
70,435
181,184
(97,070)
19,711
942,197
17.40
15.25
16.65
10.61%
11.88%
N/A
16.02%
17.57%
2,771,462 $
2,116,035
4,887,497 $
3,039,998 $
2,250,460
5,290,458 $
2,850,494 $
2,350,718
5,201,212 $
2,691,423 $
2,374,709
5,066,132 $
2,841,111
2,622,001
5,463,112
26
The ratios shown below demonstrate Oriental’s ability to generate sufficient earnings to pay the fixed charges or expenses of its debt
and preferred stock dividends. Oriental’s consolidated ratios of earnings to combined fixed charges and preferred stock dividends were
computed by dividing earnings by combined fixed charges and preferred stock dividends, as specified below, using two different
assumptions, one excluding interest on deposits and the second including interest on deposits:
2018
Year Ended December 31,
2016
2015
2017
2014
Consolidated Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
Excluding interests on deposits
Including interests on deposits
5.54
3.03x
2.91x
1.92x
2.60x
1.97x
(A)
(A)
2.81x
2.16x
(A) In 2015, earnings were not sufficient to cover preferred stock dividends, and the ratio was less than 1:1. The Company would have had to generate additional
earnings of $34 million to achieve a ratio of 1:1 in 2015.
For purposes of computing these consolidated ratios, earnings represent income before income taxes plus fixed charges and
amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of
debt issuance costs, and Oriental’s estimate of the interest component of rental expense. The term “preferred stock dividends” is the
amount of pre-tax earnings that is required to pay dividends on Oriental’s outstanding preferred stock. As of December 31, 2018,
Oriental had noncumulative perpetual preferred stock issued and outstanding amounting to $92.0 million, as follows: (i) Series A
amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value; (ii) Series B amounting to $34.5 million or
1,380,000 shares at a $25 liquidation value; and (iii) Series D amounting to $24.0 million or 960,000 shares at a $25 liquidation value.
As of December 31, 2017, 2016, 2015, and 2014, Oriental had non-cumulative perpetual preferred stock issued and outstanding
amounting to $176.0 million, which included $84.0 million or 84,000 shares of Series C at $1,000 liquidation value, which was
converted on October 22, 2018 by Oriental into common shares at a conversion rate of 86.4225.
27
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, 2018
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by Oriental conform with GAAP and general practices within the financial services
industry. Oriental’s significant accounting policies are described in detail in Note 1 to the consolidated financial statements and should
be read in conjunction with this section.
Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the
effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and
circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those
estimates. The following MD&A section is a summary of what management considers Oriental’s critical accounting policies and
estimates.
Fair Value Measurement of Financial Instruments
Oriental currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage
servicing rights and contingent consideration. Occasionally, Oriental may be required to record at fair value other assets on a
nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets.
These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-
downs of individual assets.
Oriental categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is
based on whether the inputs to the valuation methodology used for fair value measurement are observable.
Oriental requires the use of observable inputs when available, in order to minimize the use of unobservable inputs to determine fair
value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in
those securities. The amount of judgment involved in estimating the fair value of a financial instrument depends upon the availability
of quoted market prices or observable market parameters. In addition, it may be affected by other factors such as the type of
instrument, the liquidity of the market for the instrument, transparency around the inputs to the valuation, as well as the contractual
characteristics of the instrument.
If listed prices or quotes are not available, Oriental employs valuation models that primarily use market-based inputs including yield
curves, interest rate curves, volatilities, credit curves, and discount, prepayment and delinquency rates, among other considerations.
When market observable data is not available, the valuation of financial instruments becomes more subjective and involves substantial
judgment. The need to use unobservable inputs generally results from diminished observability of both actual trades and assumptions
resulting from the lack of market liquidity for those types of loans or securities. When fair values are estimated based on modeling
techniques such as discounted cash flow models, Oriental uses assumptions such as interest rates, prepayment speeds, default rates,
loss severity rates and discount rates. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair
value is adequately representative of the price that would be received or paid in the marketplace.
Management believes that fair values are reasonable and consistent with the fair value measurement guidance based on Oriental’s
internal validation procedure and consistency of the processes followed, which include obtaining market quotes when possible or
using valuation techniques that incorporate market-based inputs.
Refer to Note 27 to the consolidated financial statements for information on Oriental’s fair value measurement disclosures required by
the applicable accounting standard. At December 31, 2018, 99%, of the assets measured at fair value on a recurring basis used market-
28
based or market-derived valuation methodology and, therefore, were classified as Level 1 or Level 2. Level 2 classified instruments
consisted primarily of U.S. Treasury securities, obligations of U.S. Government-sponsored entities, most mortgage-backed securities
(“MBS”), and collateralized mortgage obligations (“CMOs”), and derivative instruments.
Trading Account Securities and Investment Securities Available-for-Sale
The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party
pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source
are documented and validated internally according to their significance for Oriental’s financial statements. Management has
established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained
from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year
ended December 31, 2018, Oriental did not adjust any prices obtained from pricing service providers.
Inputs are evaluated to ascertain that they consider current market conditions, including the relative liquidity of the market. When a
market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price
for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the
pricing service provider relies on specific information including buy side clients, credit ratings, spreads to established benchmarks and
transactions on similar securities, to draw correlations based on the characteristics of the evaluated instrument. If for any reason the
pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument.
During the year ended December 31, 2018, none of Oriental’s investment securities were subject to pricing discontinuance by the
pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be
consistent with the fair value measurement guidance.
Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes
analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include,
for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings,
economic environment, creditworthiness of the issuers and any guarantees.
Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each
period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis
performed by Oriental includes validation procedures and review of market changes, pricing methodology, assumption and level
hierarchy changes, and evaluation of distressed transactions.
Refer to Note 27 to the consolidated financial statements for a description of Oriental’s valuation methodologies used for the assets
and liabilities measured at fair value.
Interest on Loans and Allowance for Loan and Lease Losses
Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding.
Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all
previously accrued and unpaid interest is charged against income and the loan is accounted for either on a cash-basis method or on the
cost-recovery method. Loans designated as non-accruing are returned to accrual status when Oriental expects repayment of the
remaining contractual principal and interest. The determination as to the ultimate collectability of the loan’s balance may involve
management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment.
Refer to the MD&A section titled Credit Risk Management, particularly the “Non-performing Assets” sub-section, for a detailed
description of Oriental’s non-accruing and charge-off policies by major loan categories.
One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan and lease
losses. The provision for loan losses charged to current operations is based on this determination. Oriental’s assessment of the
allowance for loan and lease losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies
29
in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.
For a detailed description of the principal factors used to determine the general reserves of the allowance for loan and lease losses and
for the principal enhancements management made to its methodology, refer to Notes 1 and 7 to the consolidated financial statements.
According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current
information and events, it is probable that the principal and/or interest are not going to be collected according to the original
contractual terms of the loan agreement. Current information and events include “environmental” factors, such as existing industry,
geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of
the loan is likely to occur. The collateral dependent method is generally used for the impairment determination on commercial loans
since the expected realizable value of the loan is based upon the proceeds received from the liquidation of the collateral property. For
commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject
borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash
flow to use the discounted cash flow valuation method. Appraisals may be adjusted due to their age, property conditions, geographical
area or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss
severity information that can provide historical trends in the real estate market. Discount rates used may change from time to time
based on management’s estimates.
For additional information on Oriental’s policy of its impaired loans, refer to Note 1 to the consolidated financial statements.
Oriental’s management evaluates the adequacy of the allowance for loan and lease losses on a quarterly basis following a systematic
methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of
the allowance for loan and lease losses, Oriental must rely on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect
management’s estimates are the years of historical data to include when estimating losses, the level of volatility of losses in a specific
portfolio, changes in underwriting standards, financial accounting standards and loan impairment measurement, among others.
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition
of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently,
the business, financial condition, liquidity, capital and results of operations could also be affected.
A restructuring constitutes a "troubled-debt restructuring" ("TDR") when Oriental separately concludes that the restructuring
constitutes a concession and the debtor is experiencing financial difficulties. For information on Oriental’s TDR policy, refer to Note 1
to the financial consolidated statements.
Acquisition Accounting for Loans
Oriental has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted
Eurobank acquisition in April 2010. Oriental accounted for both acquisitions under the accounting guidance of ASC Topic 805,
Business Combinations, which requires the use of the purchase method of accounting.
All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan and lease losses related to the
acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporated assumptions regarding credit
risk. Loans acquired were recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. These
fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of
expected principal, interest and other cash flows.
Because the FDIC agreed to reimburse Oriental for losses related to the acquired loans in the FDIC-assisted Eurobank transaction,
subject to certain provisions specified in the agreements, an indemnification asset was recorded at fair value at the acquisition date.
The indemnification asset was recognized at the same time as the indemnified loans, and was measured on the same basis, subject to
collectability or contractual limitations. The shared-loss indemnification asset on the acquisition date reflected the reimbursements
expected to be received from the FDIC, using an appropriate discount rate, which reflected counterparty credit risk and other
uncertainties. On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss
agreements related to the FDIC-assisted acquisition.
The initial valuation of these loans and related indemnification asset required management to make subjective judgments concerning
30
estimates about how the acquired loans would perform in the future using valuation methods, including discounted cash flow analyses
and independent third-party appraisals. Factors that may significantly affect the initial valuation included, among others, market-based
and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses,
estimated timing of credit losses including the timing of foreclosure and liquidation of collateral, expected prepayment rates, required
or anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any shared-loss agreement, and
specific industry and market conditions that may impact discount rates and independent third-party appraisals.
For both acquisitions, Oriental considered the following factors as indicators that an acquired loan had evidence of deterioration in
credit quality and was therefore in the scope of ASC 310-30:
• Loans that were 90 days or more past due;
• Loans that had an internal risk rating of substandard or worse substandard is consistent with regulatory definitions and is
defined as having a well-defined weakness that jeopardizes liquidation of the loan;
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and
• Loans that had been previously modified in a troubled debt restructuring.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660
acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660
were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that
any differences between the contractually required loan payments in excess of Oriental’s initial investment in the loans be accreted
into interest income on a level-yield basis over the life of the loan. Loans acquired in the BBVAPR Acquisition that were accounted
for under the provisions of ASC 310-20, which had fully amortized their premium or discount recorded at the date of acquisition, are
removed from the acquired loan category. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in
accordance with Oriental’s non-accruing policy and any accretion of discount is discontinued. These assets were recorded at estimated
fair value on their acquisition date, incorporating an estimate of future expected cash flows. Such fair value includes a credit discount
which accounts for expected loan losses over the estimated life of these loans. Management takes into consideration this credit
discount when determining the necessary allowance for acquired loans that are accounted for under the provisions of ASC 310-20.
The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated
loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Oriental performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. Oriental determined
that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the
valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit
losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the
amounts of contractually required principal and interest that Oriental did not expect to collect as of the acquisition date. Based on the
guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired
pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount
attributable, at least in part, to credit quality, and (iii) were not subsequently accounted for at fair value.
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as
the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred
over the life of the acquired loans. Subsequent decreases to the expected cash flows require Oriental to evaluate the need for an
addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated
31
allowance for loan losses, if any, and the reversal of a corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
Oriental’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the
acquired loans to date and Oriental’s best estimates for the expected lifetime credit performance of the loans using currently available
information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the
fair value adjustment.
In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount
of cash flows expected to be collected. Oriental performs such an evaluation on a quarterly basis on both its acquired loans
individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy.
Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this
evaluation, a determination is made as to whether or not Oriental has a reasonable expectation about the timing and amount of cash
flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that
incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with
consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated
historical loss data and are applied to each pool.
To the extent that Oriental cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for
loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as Oriental can reasonably
estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest in Oriental’s financial statement disclosures, regardless
of whether or not Oriental expects any principal or interest cash flows on an individual loan 90 days or more past due.
Oriental writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
32
FINANCIAL HIGHLIGHTS
Summary for the fourth quarter of 2018
• Net income available to shareholders of $23.1 million or $0.45 per fully diluted share compared to the third quarter of 2018 with
$19.6 million or $0.42 per share and to the fourth quarter of 2017 with $13.6 million or $0.30 per share.
•
Originated loan growth of 3.0% from the preceding quarter to $3.66 billion, with new loan production of $323.0 million, continuing
to exceed $300 million for the fourth consecutive quarter.
• Strong performance metrics, with net interest margin of 5.26%, return on average assets of 1.50%, return on average tangible
common stockholders’ equity of 11.67%, and efficiency ratio of 51.06%.
• Record total stockholders’ equity of approximately $1 billion, with book value per common share of $17.90, tangible book value
per common share of $16.15, and capital metrics at multi-year highs.
• Common equity increased $84.0 million and preferred dividend payments dropped 53.0% from the preceding quarter with the
conversion into common stock of the Series C 8.750% Non-Cumulative Convertible Perpetual Preferred Stock.
•
16.7% increase in the regular quarterly cash dividend per common share to $0.07, resulting in an annualized rate of $0.28 per share.
Summary for the year ended 2018
Oriental achieved strong core growth in 2018 based on the continued success of our strategy of differentiation – providing superior
customer service, convenience and technology – coupled with Puerto Rico’s emerging economic rebound.
Oriental’s operational and financial results for the year included the following:
Operationally:
•
originated loans were up 17.3%;
•
average deposits grew 4.3% year over year;
•
average non-interest-bearing deposits were up 25%;
•
customer count expanded 4.6%;
• NIM increased 5 basis points; and
•
credit quality consistently improved.
Financially:
•
•
•
earnings per share increased 73%;
return on average assets expanded 47 basis points and return on average tangible common equity increased 431 basis points;
converted the Series C preferred into common stock, which significantly boosted stockholders’ equity and enabled Oriental
to reduce our payout of preferred dividends;
increased Oriental’s quarterly common dividend 17% to 28 cents per share a year; and
all capital metrics hit multi-year highs.
•
•
Net income available to shareholders of $72.4 million or $1.52 per fully diluted share compared to the year ended 2017 with $38.8
million or $0.88 per share. 2017 included a $32.4 million pre-tax loan loss provision related to hurricanes Irma and Maria.
33
ANALYSIS OF RESULTS OF OPERATIONS
The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income,
expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the years ended December
31, 2018 and 2017:
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Interest
Average rate
Average balance
December December
2018
2017
Decemb
Decemb
er
er
2018
2017
(Dollars in thousands)
December
2018
December
2017
A - TAX EQUIVALENT SPREAD
Interest-earning assets
Tax equivalent adjustment
Interest-earning assets - tax equivalent
Interest-bearing liabilities
8,003
$ 360,419 $ 345,647
4,791
368,422 350,438
41,475
44,525
6.02%
0.13%
6.15%
0.83%
5.94% $
0.08%
6.02%
0.79%
5,985,523 $
-
5,985,523
5,353,138
5,818,597
-
5,818,597
5,226,654
Tax equivalent net interest income / spread
323,897 308,963
5.32%
5.23%
632,385
591,943
Tax equivalent interest rate margin
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment 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
5.45%
5.31%
32,340
28,607
2.50%
2.28%
1,293,407
1,255,881
6,698
39,038
4,619
33,226
1.95%
2.38%
1.06%
1.96%
343,982
1,637,389
436,913
1,692,794
35,499
86,734
42,112
95,805
5.37%
5.20%
37,465
71,685
5.73%
5.97%
39,133 11.94% 11.99%
9.61%
9.31%
78,626
7.33%
7.40%
260,150 226,909
683,228
1,452,314
352,760
1,029,039
3,517,341
697,873
1,251,051
326,482
818,155
3,093,561
27,248
14,408
2,880
3,861
48,397
12,834
5.63%
5.45%
30,205
20,488
8.53%
7.54%
4,534 21.04% 15.98%
9,726 11.61% 10.72%
64,953
7.25%
6.56%
20,559 13.83% 15.04%
7.57%
7.39%
5.94%
6.02%
499,874
191,176
13,691
33,251
737,992
92,801
4,348,134
5,985,523
536,247
240,267
28,375
90,698
895,587
136,655
4,125,803
5,818,597
321,381 312,421
360,419 345,647
34
Interest
Average rate
Average balance
December December December
2017
2018
2018
Decembe
r
2017
December December
2018
2017
Interest-bearing liabilities:
Deposits:
NOW Accounts
Savings and money market
Time deposits
Total core deposits
Brokered deposits
Non-interest bearing deposits
Core deposit intangible amortization
Total deposits
Borrowings:
(Dollars in thousands)
4,496
6,364
11,483
22,343
9,751
32,094
-
859
32,953
3,893
5,922
11,352
21,167
8,211
29,378
-
920
30,298
0.42%
0.52%
1.13%
0.67%
1.97%
0.84%
0.00%
0.00%
0.67%
0.37%
0.51%
1.09%
0.65%
1.47%
0.77%
0.00%
0.00%
0.65%
1,079,538 1,059,051
1,216,635 1,170,800
1,019,062 1,039,034
3,315,235 3,268,885
557,115
3,811,406 3,826,000
860,287
1,075,681
-
-
4,887,087 4,686,287
496,171
Securities sold under agreements to repurchase
Advances from FHLB and other borrowings
Subordinated capital notes
Total borrowings
Total interest bearing liabilities
7,794
1,875
1,903
11,572
44,525
7,223
2,398
1,556
11,177
41,475
2.18%
2.57%
5.28%
2.48%
0.83%
1.80%
2.32%
4.31%
2.07%
0.79%
357,086
72,882
36,083
466,051
401,070
103,214
36,083
540,367
5,353,138 5,226,654
Net interest income / spread
$ 315,894 $ 304,172
5.19%
5.15%
Interest rate margin
5.28%
5.23%
Excess of average interest-earning assets
over average interest-bearing liabilities
Average interest-earning assets to average
interest-bearing liabilities ratio
$
632,385 $
591,943
111.81%
111.33%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume
Rate
(In thousands)
Total
Interest Income:
Investments
Loans
Total interest income
Interest Expense:
Deposits
Repurchase agreements
Other borrowings
Total interest expense
Net Interest Income
$
(1,087) $
12,878
11,791
6,899 $
(3,918)
2,981
5,812
8,960
14,772
1,298
(791)
(863)
(356)
$ 12,147 $
2,655
1,357
571
1,362
(176)
687
3,406
3,050
(425) $ 11,722
35
TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
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
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 Decembe
r
2017
2016
2017
Decembe
r
2016
December December
2017
2016
(Dollars in thousands)
$ 345,647 $ 356,592
4,724
361,316
57,136
304,180
4,791
350,438
41,475
308,963
5.94%
0.08%
6.02%
0.79%
5.23%
5.31%
-
5.74% $ 5,818,597 $ 6,210,003
0.08%
-
5.82% 5,818,597 6,210,003
1.00% 5,226,654 5,703,927
4.82%
506,076
591,943
4.90%
28,607
4,619
33,226
32,146
2,501
34,647
2.28%
1.06%
1.96%
2.39% 1,255,881 1,346,261
0.52%
484,586
436,913
1.89% 1,692,794 1,830,847
37,465
71,685
39,133
78,626
226,909
39,621
63,186
33,723
69,152
205,682
5.37%
5.73%
11.99%
9.61%
7.33%
5.33%
743,838
697,873
4.56% 1,251,051 1,385,421
286,489
326,482
11.77%
9.65%
716,373
818,155
6.57% 3,093,561 3,132,121
30,205
20,488
4,534
9,726
64,953
20,559
312,421
345,647
32,833
26,288
5,627
21,016
85,764
30,499
321,945
356,592
5.63%
8.53%
15.98%
10.72%
7.25%
15.04%
7.57%
5.94%
536,247
240,267
28,375
90,698
586,100
5.60%
302,323
8.70%
33,662
16.72%
185,280
11.34%
895,587 1,107,365
7.74%
21.84%
139,670
136,655
7.35% 4,125,803 4,379,156
5.74% 5,818,597 6,210,003
36
Interest
Average rate
December December Decembe
2016
r
2017
2017
Decembe
r
2016
Average balance
December December
2017
2016
Interest-bearing liabilities:
Deposits:
NOW Accounts
Savings and money market
Time deposits
Total core deposits
Brokered 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)
$
3,893 $
5,922
11,352
21,167
8,211
29,378
-
-
920
30,298
5,086
5,441
10,582
21,109
7,450
28,559
-
(340)
1,034
29,253
7,223
2,398
1,556
11,177
41,475
18,805
6,186
2,921
27,912
57,165
$ 304,148 $ 299,395
0.37%
0.51%
1.09%
0.65%
1.47%
0.77%
0.00%
0.00%
0.00%
0.65%
1.80%
2.32%
4.31%
2.07%
0.79%
5.15%
5.23%
0.42% $ 1,059,051 $ 1,200,394
0.49% 1,170,800 1,114,931
999,231
1.06% 1,039,034
0.64% 3,268,885 3,314,556
1.20%
619,569
557,115
0.73% 3,826,000 3,934,125
860,287 $ 781,877
0.00%
-
0.00%
0.00%
-
0.62% 4,686,287 4,716,002
-
-
663,845
401,070
2.83%
238,366
103,214
2.60%
85,714
36,083
3.41%
2.83%
987,925
540,367
1.00% 5,226,654 5,703,927
4.74%
4.82%
$ 591,943 $ 506,076
111.33%
108.87%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume
Rate
(In thousands)
Total
Interest Income:
Investments
Loans
Total interest income
Interest Expense:
Deposits
Repurchase agreements
Other borrowings
Total interest expense
Net Interest Income
$
(2,613) $
(17,868)
(20,481)
(184)
(7,444)
(5,193)
(12,821)
$
(7,660) $
1,192 $
8,344
9,536
(1,421)
(9,524)
(10,945)
1,229
(4,138)
40
(2,869)
12,405 $
1,045
(11,582)
(5,153)
(15,690)
4,745
37
Net Interest Income
Net interest income is a function of the difference between rates earned on Oriental’s interest-earning assets and rates paid on its
interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities
(interest rate margin). Oriental constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net
interest income at adequate levels.
Comparison of the years ended December 31, 2018 and 2017
Net interest income of $315.9 million increased $11.7 million from $304.2 million. Interest rate spread increased 4 basis points to
5.19% from 5.15% and net interest margin increased 5 basis points to 5.28% from 5.23%. These increases are mainly due to the net
effect of an increase of 8 basis points in the average yield of total interest-earning assets and an increase of 4 basis point in average
cost of interest-bearing liabilities.
Net interest income increased as a result of:
• Higher interest income from investment of $5.8 million, reflecting an increase in interest rates of $6.8 million, partially offset
by a decrease in volume of $944 thousand. Cash and money market investments increased 87 basis points and investments
securities increased 22 basis points, both mainly due to higher rates; and
• Higher interest income from originated loans of $33.5 million, reflecting higher balances in the auto, commercial and
consumer portfolios. This increase also reflects higher interest rates in the originated loan portfolio by 7 basis points.
Such increases in net interest income were adversely impacted:
• A decrease of $24.5 million in the interest income from acquired loans as such loans continue to be repaid, and a decrease of
$2.6 million in cost recoveries.
Comparison of years ended December 31, 2017 and 2016
Net interest income of $304.2 million increased $4.8 million from $299.4 million. Interest rate spread increased 41 basis points to
5.15% from 4.74% and net interest margin increased 41 basis points to 5.23% from 4.82%. These increases are mainly due to the net
effect of a 20 basis point increase in the average yield of interest-earning assets from 5.74% to 5.94% and a 21 basis point decrease in
average costs of interest-bearing liabilities from 1.00% to 0.79%.
Net interest income was positively impacted by:
• Higher interest income from originated loans of $21.4 million, reflecting the recognition of $4.8 million from the pay-off
before maturity of a commercial loan previously classified as non-accrual, and from higher yields in the commercial and
retail loan portfolios;
• The recognition of $3.1 million in cost recoveries from the loan pay-off by the Puerto Rico Housing Finance Authority
(PRHFA) included as interest income from acquired BBVAPR loans; and
• Lower interest expenses on securities sold under agreements to repurchase due to decreases in volume and interest rate of
$7.4 million and $4.1 million, respectively, mainly as a result of (i) the repayment at maturity of a $232.0 million repurchase
agreement at 4.78% in March 2017, and (ii) the unwinding of $180.0 million repurchase agreements during 2017.
Net interest income was adversely impacted by:
• A decrease of $30.9 million in the interest income from the acquired BBVAPR and Eurobank loan portfolios as such loans
continue to be repaid;
• A slight increase in interest expenses from deposits of 3.6% to $30.3 million, reflecting lower volume balances by $184
thousand, offset by $1.2 million higher interest rates; and
38
• A slight decrease in interest income from investments of 4.1% to $1.4 million, reflecting lower volume balances offset by
higher yields on cash balances.
39
TABLE 2 - NON-INTEREST INCOME SUMMARY
Banking service revenue
Wealth management revenue
Mortgage banking activities
Total banking and financial service revenue
FDIC shared-loss benefit
Net gain on:
Sale of securities available for sale
Derivatives
Early extinguishment of debt
Other non-interest income
Total non-interest income, net
Non-Interest Income
Year Ended December 31,
2018
2017
(Dollars in thousands)
Variance
$
$
43,638 $
25,934
4,767
74,339
-
-
-
-
5,756
5,756
80,095 $
39,468
25,790
4,050
69,308
1,403
6,896
132
(80)
1,028
9,379
78,687
10.6%
0.6%
17.7%
7.3%
-100.0%
-100.0%
-100.0%
100.0%
459.9%
-38.6%
1.8%
Non-interest income is affected by the amount of the trust department assets under management, transactions generated by clients’
financial assets serviced by the securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities,
fees generated from loans and deposit accounts, and gains on sales of assets.
Comparison of years ended December 31, 2018 and 2017
Oriental recorded non-interest income, net, in the amount of $80.1 million, compared to $78.7 million, an increase of 1.8%, or $1.4
million. The net increase in non-interest income was mainly due to:
• An increase of $4.2 million in banking service revenue, mainly due to higher electronic banking fees from higher transaction
volume and sales. Merchant business fees increased $2.1 million and debit card interchange fees increased $2.0 million.
• An increase of $717 thousand in mortgage banking activities, mainly from higher net servicing fees by $1.1 million due to
higher valuation of servicing asset by $931 thousand, related to an increase in price, partially offset by lower gains on loans
sold due to lower volume by $364 thousand; and
• A $5.0 million cash payment received from the Company’s insurance carrier covering hurricane Marias’s impact on
Oriental’s operations included in other non-interest income, offset by the sale of $166.0 million mortgage-backed securities at
a gain of $6.9 million and the FDIC shared-loss benefit of $1.4 million in 2017.
Comparison of years ended December 31, 2017 and 2016
Oriental recorded non-interest income, net, in the amount of $78.7 million, compared to $66.8 million, an increase of 17.8%, or $11.9
million. The increase in non-interest income was mainly due to:
• The elimination of the FDIC shared-loss expense as Oriental entered into an agreement with the FDIC to terminate the
shared-loss agreements covering certain assets during the first quarter of 2017. During 2016, Oriental recorded expenses of
$13.6 million related to such agreement; and
• The sale of $166.0 million of its mortgage-backed securities, generating a gain of $6.9 million. As a result of this sale,
Oriental unwound $100 million of repurchase agreements at a cost of $80 thousand, included as a loss on early
extinguishment of debt in the consolidated statements of operations. The transaction resulted in a net benefit of $6.8 million.
40
In the same period in 2016, Oriental sold $277.2 million in mortgage-backed securities and $11.1 million in Puerto Rico
government bonds, resulting in a gain of $12.2 million. This transaction resulted in the repayment before maturity of $268.0
million of a repurchase agreement at a cost of $12.0 million, included as a loss on the early extinguishment of debt in the
consolidated statements of operations. The transaction resulted in a net benefit of $207 thousand.
The increase in non-interest income was partially offset by:
• A decrease in banking service revenue of 5.2% or $2.2 million, reflecting lower electronic banking fees, mainly related to
business interruption from the lack of electricity as a consequence of hurricanes Irma and Maria which struck the island on
September 7, 2017 and September 20, 2017, respectively; and
• A decrease in other non-interest income of $5.1 million which reflects the receipt of $5.0 million during 2016 from a loss in
2009 related to a private label collateralized mortgage obligation.
41
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Year Ended December 31,
2017
2018
(Dollars in thousands)
Variance %
Compensation and employee benefits
Occupancy and equipment
Electronic banking charges
Professional and service fees
Taxes, other than payroll and income taxes
Credit related expenses
Information technology expenses
Insurance
Advertising, business promotion, and strategic initiatives
Loan servicing and clearing expenses
Loss on sale of foreclosed real estate and other repossessed assets
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
$
$
$
$
76,524 $
33,084
21,234
12,442
9,017
8,890
8,227
6,249
5,084
4,810
4,662
3,447
2,217
1,089
10,105
207,081 $
79,751
32,557
19,322
12,406
9,187
7,992
8,010
5,223
5,616
4,693
4,634
3,415
2,437
1,072
5,316
201,631
53.07%
53.99%
36.95%
1.19%
1,392
54.97 $
3,124 $
39.55%
1.27%
1,450
55.00
2,846
-4.0%
1.6%
9.9%
0.3%
-1.9%
11.2%
2.7%
19.6%
-9.5%
2.5%
0.6%
0.9%
-9.0%
1.6%
90.1%
2.7%
42
Non-Interest Expenses
Comparison of years ended December 31, 2018 and 2017
Non-interest expense was $207.1 million, representing an increase of 2.7% compared to $201.6 million.
The increase in non-interest expenses was driven by:
• Higher other operating expenses by $4.8 million, mainly attributed to an increase in the reasonable estimate accrual of claims
and settlements in the broker-dealer subsidiary and to minor repairs to physical assets related to the impact of hurricanes;
• Higher electronic banking charges by $1.9 million from increased transaction volume;
• Higher insurance expenses by $1.0 million related to an increase in insurance premiums renewal as a consequence of
hurricanes; and
• Higher credit-related expenses by $898 thousand related to higher legal fees on foreclosed properties and other real estate
owned expenses.
The increases in the foregoing non-interest expenses were offset by:
• Lower compensation and employee benefits by $3.2 million, mainly due to a decrease in the average number of employees.
The efficiency ratio improved from 53.99% to 53.07%. The efficiency ratio measures how much of Oriental’s revenues is used to pay
operating expenses. Oriental computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and
non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, FDIC shared-loss benefit,
losses on the early extinguishment of debt, other gains and losses, and other income that may be considered volatile in nature.
Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest
income that are excluded from efficiency ratio computation for the years ended December 31, 2018 and 2017 amounted to $5.8
million and $9.4 million, respectively.
Oriental implemented its disaster response plan as hurricanes Irma and Maria approached its service areas. To operate in disaster
response mode, Oriental incurred expenses for, among other things, buying diesel and generators for electric power, debris removal,
security services, property damages mitigation, and emergency communication with customers regarding the status of its banking
operations. Estimated losses at December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at December
31, 2018.
Oriental maintains insurance for casualty losses as well as for disaster response costs and certain revenue lost through business
interruption. Oriental received a $1.0 million partial payment from its insurance carrier in December 2017 and a $5.7 million payment
during 2018.
Comparison of years ended December 31, 2017 and 2016
Non-interest expense was $201.6 million, representing a decrease of 6.6% compared to $216.0 million.
The decrease in non-interest expenses was driven by:
• Lower losses on the sale of foreclosed real estate and other repossessed assets by $5.6 million due to higher sales of
foreclosed real estate at a gain and lower write-downs, mainly in the acquired portfolio;
• Lower insurance expenses by $3.9 million as a result of a change in the calculation method of the FDIC Deposit Insurance
Fund insurance. The change was effective beginning with June 30, 2016 invoice, which was received during the third quarter
of 2016;
43
• Lower loan servicing and clearing expenses by $3.6 million, mainly due to a reduction of $3.2 million in mortgage servicing
expense from the migration to in-house servicing during the third quarter of 2016;
• Lower credit related expenses by $2.3 million, mainly due to a decrease in legal expenses from foreclosures of $1.9 million;
and
• Lower other operating expense by $3.4 million due to the settlement of outstanding claims at amounts below those previously
reserved by $1.4 million and decrease of $2.4 million in accrual for claims and settlements expenses in our broker dealer
subsidiary.
The decreases in the foregoing non-interest expenses were partially offset by:
• Higher compensation and employee benefits by $3.0 million as a result of higher average employees until hurricane Maria;
and
• Higher occupancy and equipment expenses by $2.3 million, primarily due to lower rent income and an increase in internet
services.
The efficiency ratio improved to 53.99% from 57.82%. The efficiency ratio measures how much of Oriental’s revenues is used to pay
operating expenses. Oriental computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and
non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, FDIC shared-loss
benefit/expense, losses on the early extinguishment of debt, other gains and losses, and other income that may be considered volatile
in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-
interest income that are excluded from efficiency ratio computation for 2017 and 2016 amounted to $9.4 million income and a $7.3
million loss, respectively.
Provision for Loan and Lease Losses
Comparison of years ended December 31, 2018 and 2017
Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision
for the year was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses
based upon an evaluation of known and inherent risks.
Provision for loan and lease losses decreased 50.4%, or $57.0 million, to $56.1 million. The decrease in the provision was mostly due
to:
• The hurricanes provision of $32.4 million in 2017;
• A $4.3 million provision in the second quarter of 2017 to charge-off the loss on sale of a loan to a Puerto Rico government
municipality and a $5.9 million provision to increase the general allowance on the remaining municipal loan portfolio; and
• The decrease in acquired loan portfolio provision of $9.2 million, mainly from lower portfolio balances.
Please refer to the "Allowance for Loan and Lease Losses" in the "Credit Risk Management" section of this MD&A for a more
detailed analysis of the allowance for loan and lease losses.
Comparison of years ended December 31, 2017 and 2016
Provision for loan and lease losses increased 73.9%, or $48.1 million, to $113.1 million. Oriental was impacted by hurricanes Irma
and Maria, which struck the island on September 7, 2017 and September 20, 2017, respectively. Based on our assessment of the facts
related to these hurricanes, we increased our provision for loan losses $32.4 million, $17.2 million for originated loans and $15.2
million for acquired loans.
44
Excluding the special provision made as a result of the hurricanes in 2017, the total provision increased $15.7 million. Provision for
originated and other loan and lease losses increased by $17.3 million, mainly from the increase in the provision for commercial loans.
Such provision includes $4.3 million recorded to charge-off the loss on sale of a municipal loan and another provision of $5.9 million
recorded for the general allowance on the municipal loan portfolio during the second quarter of 2017.
Income Taxes
Comparison of years ended December 31, 2018 and 2017
Income tax expense was $48.4 million, compared to $15.4 million, reflecting the effective income tax rate of 33.6% and the net
income before income taxes of $132.8 million for 2018. The income tax expense included a non-cash expenses of $4.1 million
reflecting the impact of changes required as a result of new Puerto Rico tax reform legislation, which will reduce the corporate income
tax rate by 1.5% in 2019 and, therefore, caused Oriental to take a deferred tax asset write-down.
Comparison of years ended December 31, 2017 and 2016
Income tax expense was $15.4 million, compared to $26.0 million, reflecting the effective income tax rate of 22.7% and the net
income before income taxes of $68.1 million for 2017, due to higher a proportion of exempt income and income subject to preferential
rates.
Business Segments
Oriental segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury.
Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic
characteristics of its services were also considered in the determination of the reportable segments. Oriental measures the performance
of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income,
loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is based on several
factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of
operations and the selected financial information by operating segment for the years ended December 31, 2018 and 2017.
45
Banking
Management
Wealth
Year Ended December 31, 2018
Total Major
Segments
Treasury
Eliminations
Total
Consolidated
320,084 $
(29,746)
290,338
(55,885)
53,592
(186,460)
2,126
-
103,711 $
40,447
63,264 $
46 $
-
46
-
26,457
(16,440)
-
(788)
9,275 $
3,617
5,658 $
(In thousands)
40,289 $
(14,779)
25,510
360,419 $
(44,525)
315,894
(223)
46
(4,181)
-
(1,338)
(56,108)
80,095
(207,081)
2,126
(2,126)
19,814 $
132,800 $
4,326
15,488 $
48,390
84,410 $
- $
-
-
360,419
(44,525)
315,894
-
-
-
(2,126)
2,126
- $
-
- $
(56,108)
80,095
(207,081)
-
-
132,800
48,390
84,410
5,863,067 $
25,757 $
1,708,455 $
7,597,279 $
(1,013,927) $
6,583,352
Year Ended December 31, 2017
Wealth
Banking
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
311,503 $
(26,308)
285,195
(113,108)
45,102
(184,567)
1,604
(748)
33,478 $
13,057
20,421 $
53 $
-
53
-
26,069
(13,486)
-
(1,137)
11,499 $
4,485
7,014 $
(In thousands)
34,091 $
(15,167)
18,924
(31)
7,516
(3,578)
748
(467)
23,112 $
(2,099)
25,211 $
345,647 $
(41,475)
304,172
(113,139)
78,687
(201,631)
2,352
(2,352)
68,089 $
15,443
52,646 $
- $
-
-
-
-
-
(2,352)
2,352
- $
-
- $
345,647
(41,475)
304,172
(113,139)
78,687
(201,631)
-
-
68,089
15,443
52,646
5,597,077 $
25,980 $
1,536,417 $
7,159,474 $
(970,421) $
6,189,053
$
$
$
$
$
$
$
$
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
Income tax expense
Net income
Total assets
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
Income tax expense (benefit)
Net income
Total assets
46
Banking
Management
Treasury
Wealth
Total Major
Segments
Consolidated
Eliminations
Total
Year Ended December 31, 2016
$
321,868 $
65 $
34,659 $
356,592 $
(In thousands)
(27,838)
294,030
(65,076)
35,587
(193,156)
1,521
(883)
72,023 $
28,089
43,934 $
-
65
-
26,788
(17,443)
-
(1,108)
8,302 $
3,238
(29,327)
(57,165)
5,332
299,427
-
4,444
(5,391)
883
(413)
(65,076)
66,819
(215,990)
2,404
(2,404)
4,855 $
85,180 $
(5,333)
25,994
5,064 $
10,188 $
59,186 $
- $
-
-
-
-
-
(2,404)
2,404
- $
-
- $
356,592
(57,165)
299,427
(65,076)
66,819
(215,990)
-
-
85,180
25,994
59,186
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
Income tax expense (benefit)
Net income
Total assets
$
$
$
5,584,866 $
23,315 $
1,837,514 $
7,445,695 $
(943,871) $
6,501,824
47
Comparison of years ended December 31, 2018 and 2017
Banking
Oriental's banking segment net income before taxes increased $64.2 million from $39.5 million to $103.7 million, mainly reflecting:
• The special provision for loan and lease losses of $32.4 million related to hurricanes Irma and Maria in 2017;
• A $4.3 million provision in the second quarter of 2017 to charge-off the loss on sale of a loan to a Puerto Rico government
municipality and a $5.9 million provision to increase the general allowance on the remaining municipal loan portfolio;
• A decrease in acquired loan portfolio provision of $9.2 million, mainly from lower portfolio balances.
• A $5.0 million cash payment received from the Company’s insurance carrier covering hurricane Marias’s impact on
Oriental’s operations included in other non-interest income.
Wealth Management
Wealth management segment revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased $1.4 million to $5.7 million due to higher non-interest expenses by $3.0 million, mainly driven from the
increase in the reasonable estimate accrual of claims and settlements in the broker-dealer subsidiary by $4.2 million.
Treasury
Treasury segment net income before taxes decreased $1.6 million from $21.4 million to $19.8 million, reflecting:
• The sale of $166.0 million in mortgage-backed securities during the second quarter of 2017, which generated a gain of $6.9
million.
Such decrease was partially offset by:
• Higher interest income from investment by $5.8 million, reflecting an increase in interest rates of $6.8 million, partially offset
by a decrease in volume of $944 thousand.
Comparison of years ended December 31, 2017 and 2016
Banking
Oriental's banking segment net income before taxes decreased $32.5 million to $39.5 million, reflecting:
• A decrease in net interest income by $8.8 million, mainly from the acquired BBVAPR and Eurobank loan portfolios as such
loans continue to be repaid;
• The special provision for loan and lease losses of $32.4 million related to hurricanes Irma and Maria;
• An increase in the provision for loan and lease losses, excluding the aforementioned special hurricane provision, of $15.6
million, which includes $4.3 million recorded to charge-off the loss on sale of a municipal loan and another provision of $5.9
million recorded for the general allowance on the municipal loan portfolio during the second quarter of 2017;
• Higher non-interest income by $9.5 million, reflecting the termination of the FDIC shared-loss agreement in the first quarter
of 2017; and
• Lower non-interest expenses by $14.6 million mainly as a result of lower losses on the sale of foreclosed real estate and other
repossessed assets by $5.6 million, lower insurance expenses by $3.9 million, lower loan servicing and clearing expenses by
$3.6 million, and to lower credit related expenses by $2.3 million.
48
Wealth Management
Wealth management segment revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased $1.1 million to $7.2 million mainly due to lower activity levels in the third quarter of 2017 related to
hurricanes Irma and Maria.
Treasury
Treasury segment net income before taxes, which consists of Oriental's asset/liability management activities, such as purchase and sale
of investment securities, interest rate risk management, derivatives, and borrowings, increased to $21.4 million, compared to $4.9
million, reflecting:
• Lower interest expenses on securities sold under agreements to repurchase as a result of (i) the repayment at maturity of a
$232.0 million repurchase agreement at 4.78% in March 2017, and (ii) the unwinding of $180.0 million repurchase
agreements during 2017; and
• The sale of $166.0 million mortgage-backed securities, generating a gain of $6.9 million during 2017.
49
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At December 31, 2018, Oriental’s total assets amounted to $6.583 billion representing an increase of 6.4% when compared to $6.189
billion at December 31, 2017. This increase is attributable to an increase in the loans and investments portfolios of $375.3 million and
$113.6 million, respectively, partially offset by a decrease in cash and cash equivalents of $38.2 million.
Oriental’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other
commercial and industrial loans, consumer loans, and auto loans. At December 31, 2018, Oriental’s loan portfolio increased 9.3%.
Loan production during 2018, reached $1.411 billion compared to $917.8 million a year ago, a 53.8% increase. The non-acquired loan
portfolio increased $540.2 million from December 31, 2017 to $3.745 billion at December 31, 2018. From December 31, 2017, the
BBVAPR acquired loan portfolio decreased $149.4 million to $676.5 million and the Eurobank acquired loan portfolio decreased
$12.2 million to $87.1 million at December 31, 2018.
Oriental's investment portfolio increased 9.7% to $1.280 billion at December 31, 2018, mainly attributed to the purchase of $272.1
million mortgage-backed securities available-for-sale and retained securitized GNMA pools totaling $74.1 million, partially offset by
maturities and paydowns in the investment available-for-sale portfolio of $138.5 million and in the investment securities held-to-
maturity portfolio of $77.6 million during the year ended December 31, 2018.
Cash and cash equivalents decreased 7.9% to $447.0 million, mainly attributed to funding of new loans.
Accrued interest receivable resulting from Oriental’s loan payment moratoriums after hurricanes Irma and Maria have decreased from
December 31, 2017, as such moratoriums have expired. Some of these accrued interests is payable upon maturity of the loan.
Financial Assets Managed
Oriental’s financial assets include those managed by Oriental’s trust division, retirement plan administration subsidiary, and assets
gathered by its broker-dealer and insurance subsidiaries. Oriental’s trust division offers various types of individual retirement accounts
("IRAs") and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan
administration subsidiary, OPC, manages private retirement plans. At December 31, 2018, total assets managed by Oriental’s trust
division and OPC amounted to $2.771 billion, compared to $3.040 billion at December 31, 2017. Oriental Financial Services offers a
wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds
and money management wrap-fee programs. At December 31, 2018, total assets gathered by Oriental Financial Services and Oriental
Insurance from its customer investment accounts amounted to $2.116 billion, compared to $2.250 billion at December 31, 2017.
Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market values.
Goodwill
Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank acquisition is not amortized to
expense but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative
analysis, Oriental determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not
impaired. Oriental completes its annual goodwill impairment test as of October 31 of each year. Oriental tests for impairment by first
allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each
reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary.
If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the
goodwill.
Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or
estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units,
selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due
to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different
assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is
required.
50
Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity
for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate,
adverse actions by a regulator, unanticipated competition, the loss of key employees, or similar events. Oriental’s loan portfolio,
which is the largest component of its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local
economic and fiscal conditions. Such conditions have generally affected the market demand for non-conforming loans secured by
assets in Puerto Rico and, therefore, affect the valuation of Oriental’s assets.
As of December 31, 2018, Oriental had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0
million to the Wealth Management unit. During the last quarter of 2018, based on its annual goodwill impairment test, Oriental
determined that both units passed step one of the two-step impairment test. As a result of step one, the fair value of both units
exceeded its adjusted net book value. Accordingly, Oriental determined that the carrying value of the goodwill allocated to the
Banking unit and Wealth Management was not impaired as of the valuation date.
51
FDIC Indemnification Asset
On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to
the FDIC-assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a
payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the
anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the
end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
52
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
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
Investment 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
53
December 31
Variance
2018
2017
(Dollars in thousands)
$
978,071 $
2,265
10,805
64,064
210,169
-
12,644
1,222
364
1,279,604
4,431,594
5,711,198
445,133
4,930
33,768
34,254
113,763
68,892
10,716
347
86,069
74,282
887,779
2,879
10,163
80,071
167,338
2,093
13,995
1,538
194
1,166,050
4,056,329
5,222,379
481,212
7,021
44,174
49,969
127,421
67,860
9,821
771
86,069
92,356
872,154
966,674
%
10.2%
-21.3%
6.3%
-20.0%
25.6%
-100.0%
-9.7%
-20.5%
87.6%
9.7%
9.3%
9.4%
-7.5%
-29.8%
-23.6%
-31.4%
-10.7%
1.5%
9.1%
-55.0%
0.0%
-19.6%
-9.8%
$
6,583,352 $
6,189,053
6.4%
76.5%
0.2%
0.8%
5.0%
16.4%
0.0%
1.0%
0.1%
100.0%
76.1%
0.2%
0.9%
6.9%
14.4%
0.2%
1.2%
0.1%
100.0%
December 31
Variance
2018
2017
%
(In thousands)
$
668,809 $
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 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
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
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
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
1,597,588
348,980
1,129,695
3,745,072
(95,188)
3,649,884
7,740
3,657,624
2,546
23,988
4,435
30,969
(2,062)
28,907
492,890
182,319
-
14,403
689,612
(42,010)
647,602
676,509
63,392
47,826
846
112,064
(24,971)
87,093
763,602
4,421,226
10,368
$
4,431,594 $
54
683,607
1,307,261
330,039
883,985
3,204,892
(92,718)
3,112,174
6,695
3,118,869
4,380
28,915
21,969
55,264
(3,862)
51,402
532,053
243,092
1,431
43,696
820,272
(45,755)
774,517
825,919
69,538
53,793
1,112
124,443
(25,174)
99,269
925,188
4,044,057
12,272
4,056,329
-2.2%
22.2%
5.7%
27.8%
16.9%
2.7%
17.3%
15.6%
17.3%
-41.9%
-17.0%
-79.8%
-44.0%
-46.6%
-43.8%
-7.4%
-25.0%
-100.0%
-67.0%
-15.9%
-8.2%
-16.4%
-18.1%
-8.8%
-11.1%
-23.9%
-9.9%
-0.8%
-12.3%
-17.5%
9.3%
-15.5%
9.3%
Oriental’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as
"originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between
acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements
with the FDIC, which were terminated on February 6, 2017.
As shown in Table 5 above, total loans, net, amounted to $4.432 billion at December 31, 2018 and $4.056 billion at December 31,
2017. Oriental’s originated and other loans held-for-investment portfolio composition and trends were as follows:
• Mortgage loan portfolio amounted to $668.8 million (17.9% of the gross originated loan portfolio) compared to $683.6
million (21.3% of the gross originated loan portfolio) at December 31, 2017. Mortgage loan production totaled $119.7
million for 2018, which represents a decrease of 13.1% from $137.8 million for the same periods in 2017. Mortgage loans
included delinquent loans in the GNMA buy-back option program amounting to $19.7 million and $8.3 million at December
31, 2018 and December 31, 2017, respectively. Servicers of loans underlying GNMA mortgage-backed securities must report
as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect
not to exercise that option.
• Commercial loan portfolio amounted to $1.598 billion (42.7% of the gross originated loan portfolio) compared to $1.307
billion (40.8% of the gross originated loan portfolio) at December 31, 2017. Commercial loan production, including the U.S.
loan program production of $236.1 million, increased 101.1% to $603.5 million for 2018, from $300.2 million for the same
period in 2017.
• Consumer loan portfolio amounted to $349.0 million (9.3% of the gross originated loan portfolio) compared to $330.0
million (10.3% of the gross originated loan portfolio) at December 31, 2017. Consumer loan production increased 10.9% to
$164.9 million for 2018 from $148.6 million when compared to the same period in 2017.
• Auto and leasing portfolio amounted to $1.130 billion (30.1% of the gross originated loan portfolio) compared to $884.0
million (27.6% of the gross originated loan portfolio) at December 31, 2017. Auto production increased by 58.0% to $523.4
million for 2018, compared to $331.2 million for the same period in 2017.
55
The following table summarizes the remaining contractual maturities of Oriental’s total gross non-covered loans, excluding loans
accounted for under ASC 310-30, segmented to reflect cash flows as of December 31, 2018. Contractual maturities do not necessarily
reflect the period of resolution of a loan, considering prepayments.
Maturities
From One to
Five Years
After Five Years
-
-
-
-
-
-
-
-
-
-
Originated and other loans:
Mortgage
Commercial
Consumer
Auto and leasing
Total
Balance
Outstanding
at December
31, 2018
One Year or
Less
Fixed
Interest
Rates
Variable
Interest
Rates
Fixed
Interest
Rates
Variable
Interest
Rates
(In thousands)
$
668,809 $
2,771 $
11,608 $
- $
654,430 $
1,597,588
972,012
348,980
1,129,695
37,017
11,044
584,996
241,454
467,136
-
-
-
40,580
70,509
651,515
$
3,745,072 $
1,022,844 $
1,305,194 $
- $
1,417,034 $
- $
-
-
-
- $
- $
-
-
-
- $
Acquired loans accounted under ASC 310-20
Commercial
$
Commercial secured by real estate
Consumer
Auto
Total
1,510 $
1,036
23,988
4,435
1,510 $
941
23,988
4,106
- $
95
-
329
$
30,969 $
30,545 $
424 $
56
TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS
December 31, 2018
Higher-Risk Residential Mortgage Loans*
High Loan-to-Value Ratio
Mortgages
Junior Lien Mortgages
Interest Only Loans
LTV 90% and over
Carrying
Carrying
Carrying
Value
Allowance Coverage Value
Allowance Coverage Value
Allowance Coverage
(In thousands)
$
8,970 $
324
3.61% $
7,977 $
328
4.11% $ 56,217 $
1,183
49
67
164
232
7
9
30
33
14.29%
13.43%
18.29%
-
-
-
-
0.00%
0.00%
441
86
19.50%
14.22%
1,465
283
19.32%
1,955
991
1,964
8,081
37
79
135
569
$
9,482 $
403
4.25% $
9,883 $
697
7.05% $ 69,208 $
2,003
2.10%
1.89%
7.97%
6.87%
7.04%
2.89%
0.25%
0.26%
1.83%
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
Refinanced or Modified Loans:
Amount
$
2,274 $
273
12.01% $
511 $
61
11.94% $ 15,807 $
1,254
7.93%
Percentage of Higher-Risk Loan
Category
Loan-to-Value Ratio:
Under 70%
70% - 79%
80% - 89%
90% and over
23.98%
5.17%
22.84%
$
6,321 $
260
4.11% $
1,199 $
1,366
998
797
79
5
59
5.78%
2,194
0.50%
3,208
7.40%
3,282
$
9,482 $
403
4.25% $
9,883 $
43
112
232
310
697
3.59% $
5.10%
7.23%
- $
-
-
-
-
-
-
-
-
9.45%
69,208
2,003
7.05% $ 69,208 $
2,003
2.89%
2.89%
* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.
57
Deposits from the Puerto Rico government totaled $207.4 million at December 31, 2018. The following table includes the
maturities of Oriental's lending and investment exposure to the Puerto Rico government, which is limited solely to loans to
municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing
municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its
general obligations.
TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES
December 31, 2018
Maturity
Loans and Securities:
Carrying Value Less than 1 Year
1 to 3 Years
(In thousands)
More than 3
Years
Municipalities
$
135,871
$
18,567
$
73,451
$
43,853
58
Credit Risk Management
Allowance for Loan and Lease Losses
Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses
based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses ("ALLL") policy provides for a
detailed quarterly analysis of probable losses.
The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial
condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses,
future additions to the allowance may be required based on factors beyond Oriental’s control. We also maintain an allowance for loan
losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to the
acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount
recorded at the time of acquisition.
At December 31, 2018, Oriental’s allowance for loan and lease losses amounted to $164.2 million, a $3.3 million decrease from
$167.5 million at December 31, 2017.
As discussed in Note 2, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico in 2017. Management
performed an evaluation of the loan portfolios in order to assess the impact on repayment sources and underlying collateral that could
result in additional losses.
For the commercial portfolio, the framework for the analysis was based on our current allowance for loan and lease losses
methodology with additional considerations according to the estimated impact categorized as low, medium or high. From this impact
assessment, additional reserve levels were estimated by increasing default probabilities (“PD”) and loss given default expectations
(“LGD”) of each allowance segment.
As part of the process, Oriental contacted its clients to evaluate the impact of the hurricanes on their business operations and collateral.
The impact was then categorized as follows: (i) low risk, for clients that had no business impact or relatively insignificant impact; (ii)
medium risk, for clients that had a business impact on their primary or secondary sources of repayment, but had adequate cash flow to
cover operations and to satisfy their obligations; or (iii) high risk, for clients that had potentially significant problems that affected
primary, secondary and tertiary (collateral) sources of repayment. This criterion was used to model adjusted PDs and LGDs
considering internal and external sources of information available to support our estimation process and output.
During the fourth quarter of 2017, Oriental performed an update of the initial estimate, taking into consideration the most recent
available information gathered through additional visits and interviews with clients and the economic environment in Puerto Rico.
For the retail portfolios, mortgage, consumer and auto, the assumptions established in the initial estimate were based on the historical
losses of each ALLL segment and then further adjusted based on parameters used as key risk indicators, such as the industry of
employment for all portfolios and the location of the collateral for mortgage loans. During the fourth quarter of 2017, Oriental
performed additional procedures to evaluate the reasonability of the initial estimate based on the payment experience percentage of
borrowers for which the deferral period expired. The analysis took into consideration historical payment behavior and loss experience
of borrowers (PDs and LGDs) of each portfolio segment to develop a range of estimated potential losses. Management understands
that this approach is reasonable given the lack of historical information related to the behavior of local borrowers in such an
unprecedented event. The amount used in the analysis represents the average of potential outcomes of expected losses.
During 2018, Oriental continued its monitoring process of the performance of those affected borrowers. As additional information
became available, it was incorporated into the allowance framework.
At December 31, 2018 and 2017, Oriental's ALLL incorporated all risks associated to our loan portfolio, including the impact of
hurricanes Irma and Maria.
Tables 8 through 10 set forth an analysis of activity in the allowance for loan and lease losses and present selected loan loss statistics.
In addition, Table 5 sets forth the composition of the loan portfolio.
59
Please refer to the “Provision for Loan and Lease Losses” section in this MD&A for a more detailed analysis of provisions for loan
and lease losses.
Non-performing Assets
Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December 31,
2018 and 2017, Oriental had $119.7 million and $99.7 million, respectively, of non-accrual loans, including acquired BBVAPR loans
accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium).
At December 31, 2018 and 2017, loans whose terms have been extended and which are classified as troubled-debt restructurings that
are not included in non-performing assets amounted to $112.9 million and $109.2 million, respectively.
At December 31, 2018 and 2017, loans that are current in their monthly payments, but placed in non-accrual amounted to $21.2
million and $20.1 million, respectively. During 2018, a $8.7 million loan that is current in its monthly payments was placed in non-
accrual due to credit deterioration after the hurricanes.
Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing
loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past
due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans.
Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC
310-30, in which these loans will accrete interest income over their remaining life using estimated cash flow analyses. Credit related
decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on
these loans when it is probable that all cash flows expected at acquisition will not be collected.
Following hurricanes Irma and Maria, Oriental offered automatic payment deferrals and 90-day extensions for most loan categories.
All of these payment moratoriums expired during the first quarters of 2018 with most credit metrics better than, or returned to, pre-
hurricane levels.
At December 31, 2018, Oriental’s non-performing assets increased by 3.0% to $161.3 million (2.76% of total assets, excluding
acquired loans with deteriorated credit quality) from $156.7 million (2.95% of total assets, excluding acquired loans with deteriorated
credit quality) at December 31, 2017. Foreclosed real estate and other repossessed assets amounting to $33.8 million and $3.0 million,
respectively, at December 31, 2018, and $44.2 million and $3.5 million, respectively, at December 31, 2017, were recorded at fair
value. Oriental does not expect non-performing loans to result in significantly higher losses. At December 31, 2018, the allowance
coverage ratio for originated loan and lease losses to non-performing loans was 77.38% (87.35% at December 31, 2017).
Oriental follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio
consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans
offered by certain major U.S. mortgage loan originators. Furthermore, Oriental has never been active in negative amortization loans or
adjustable rate mortgage loans, including those with teaser rates.
The following items comprise non-performing assets:
• Originated and other loans held for investment:
Residential mortgage loans — are placed on non-accrual status when they become 90 days or more past due and are written-
down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured
mortgage loans which are placed in non-accrual when they become 12 months or more past due. At December 31, 2018,
Oriental’s originated non-performing mortgage loans totaled $63.7 million (51.1% of Oriental’s non-performing loans), a 0.6%
decrease from $64.1 million (58.7% of Oriental’s non-performing loans) at December 31, 2017.
Commercial loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if
necessary, based on the specific evaluation of the underlying collateral, if any. At December 31, 2018, Oriental’s originated non-
performing commercial loans amounted to $42.5 million (34.1% of Oriental’s non-performing loans), a 20.4% increase from
$35.3 million at December 31, 2017 (32.4% of Oriental’s non-performing loans). This increase is mainly from a $8.7 million loan
that is current in its monthly payments but was placed in non-accrual during 2018 due to credit deterioration after the hurricanes.
60
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, 2018, Oriental’s
originated non-performing consumer loans amounted to $3.4 million (2.7% of Oriental’s non-performing loans), a 30.4% increase
from $2.6 million at December 31, 2017 (2.4% of Oriental’s non-performing loans).
Auto loans and leases — are placed on non-accrual status when they become 90 days past due, partially written-off to collateral
value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At December 31,
2018, Oriental’s originated non-performing auto loans and leases amounted to $13.5 million (10.8% of Oriental’s total non-
performing loans), an increase of 218.9% from $4.2 million at December 31, 2017 (3.9% of Oriental’s total non-performing
loans), mainly due to higher balance in the portfolio.
Oriental has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage
Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while
also reducing Oriental’s losses on non-performing mortgage loans.
The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled
mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RURAL, PRHFA, conventional loans
guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional
loans retained by Oriental. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium,
mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu of foreclosure.
The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interest first,
variable interest rate, adjustable interest rate and other qualified loans. Non-traditional mortgage loan portfolios are segregated into the
following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting
guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed pursuant
Oriental’s current credit and underwriting guidelines. Oriental achieved an affordable and sustainable monthly payment by taking
specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring
the payment of principal or, if the borrower qualifies, refinancing the loan.
In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an
authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may
also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if Oriental
grants a concession for legal or economic reasons due to the debtor’s financial difficulties.
61
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN
December 31,
Variance
2018
2017
(Dollars in thousands)
%
Originated and other loans held for investment
Allowance balance:
Mortgage
Commercial
Consumer
Auto and leasing
Total allowance balance
Allowance composition:
Mortgage
Commercial
Consumer
Auto and leasing
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
$
$
19,783 $
30,326
15,571
29,508
95,188
$
20,439
30,258
16,454
25,567
92,718
-3.2%
0.2%
-5.4%
15.4%
2.7%
-5.7%
-2.3%
-7.8%
12.4%
-1.0%
-17.7%
-10.6%
-9.7%
22.0%
32.6%
17.8%
27.6%
100.0%
2.99%
2.31%
4.99%
2.89%
2.89%
-12.1%
31.89%
85.83%
639.74%
604.14%
-2.6%
-16.8%
-27.4%
-63.8%
87.35%
-11.4%
20.8%
31.9%
16.4%
31.0%
100.0%
2.96%
1.90%
4.46%
2.61%
2.54%
31.05%
71.43%
464.25%
218.67%
77.38%
62
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
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
December 31,
Variance
2018
(Dollars in thousands)
2017
%
$
$
22 $
1,905
135
2,062 $
1.1%
92.4%
6.6%
100.0%
0.86%
7.94%
3.04%
6.66%
2.32%
478.64%
67.50%
133.20%
42
3,225
595
3,862
1.09%
83.50%
15.41%
100.00%
0.96%
11.15%
2.71%
6.99%
3.31%
238.01%
332.40%
137.73%
-47.6%
-40.9%
-77.3%
-46.6%
-1.8%
10.6%
-57.5%
-10.4%
-28.8%
12.2%
-4.7%
-29.9%
101.1%
-79.7%
-3.3%
63
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
Acquired BBVAPR loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Consumer
Auto
Total allowance balance
Allowance composition:
Mortgage
Commercial
Consumer
Auto
Acquired Eurobank loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Consumer
Total allowance balance
Allowance composition:
Mortgage
Commercial
December 31,
2018
2017
(Dollars in thousands)
Variance
%
$
$
$
$
15,225 $
20,641
-
6,144
42,010 $
36.2%
49.1%
0.0%
14.6%
100.0%
15,382 $
9,585
4
24,971 $
61.6%
38.4%
100.0%
14,085
23,691
18
7,961
45,755
30.8%
51.8%
0.0%
17.4%
100.0%
15,187
9,983
4
25,174
60.3%
39.7%
100.0%
8.1%
-12.9%
-100.0%
-22.8%
-8.2%
17.7%
-5.1%
-100.0%
-15.9%
1.3%
-4.0%
0.0%
-0.8%
2.1%
-3.2%
64
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 (recapture) 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 end of year
2018
Year Ended December 31,
Variance
2017
(Dollars in thousands)
%
2016
$
$
92,718 $
52,061
(72,393)
22,802
95,188 $
59,300
79,885
(61,856)
15,389
92,718
56.4%
-34.8%
17.0%
48.2%
2.7%
$
$
112,626
45,058
(112,497)
14,113
59,300
$
3,862 $
4,300
-10.2%
$
5,542
(297)
(2,837)
1,334
2,062 $
45,755 $
1,786
-
(5,531)
42,010 $
1,847
(4,156)
1,871
3,862
31,056
24,681
-
(9,982)
45,755
25,174 $
2,567
-
21,281
6,725
-
-
(2,770)
24,971 $
-
(2,832)
25,174
$
$
$
$
$
-116.1%
-31.7%
-28.7%
-46.6%
47.3%
-92.8%
0.0%
-44.6%
-8.2%
18.3%
-61.8%
0.0%
0.0%
-2.2%
-0.8%
$
$
$
$
$
2,255
(5,816)
2,319
4,300
25,785
15,508
(282)
(9,955)
31,056
90,178
2,255
(134)
3,391
(74,409)
21,281
65
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING
LOANS ACCOUNTED FOR UNDER ASC 310-30
2018
Year Ended December 31,
Variance
%
2017
(Dollars in thousands)
2016
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
-20.0% $
79.0%
-29.6%
-11.7%
-48.9%
-4.3%
29.2%
45.3%
27.7%
25.9%
57.1%
8.1%
17.0%
48.2%
6.7% $
-27.1%
-17.6%
18.2%
-13.8%
-5.6%
26.6%
-3.8%
15.7%
8.0%
25.5%
13.0% $
(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%
754,732
1,388,424
286,489
717,913
$3,147,558
$
(5,297) $
1,047
(4,250)
(6,623)
585
(6,038)
(7,684)
1,281
(6,403)
(13,641)
1,209
(12,432)
(33,908)
12,314
(21,594)
(61,856)
15,389
(46,467)
0.85%
0.51%
3.81%
2.63%
1.49%
24.88%
(6,782)
654
(6,128)
(17,629)
1,757
(15,872)
(42,685)
19,344
(23,341)
(72,393)
22,802
(49,591) $
0.62%
0.42%
4.50%
2.27%
1.41%
31.50%
683,228
1,452,314
352,760
1,029,039
3,517,341
$
709,933
1,255,645
326,482
819,863
3,111,923
66
$
$
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:
2018
Year Ended December 31,
Variance
2017
%
(Dollars in thousands)
2016
$
$
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
$
$
(6) $
23
17
(2,459)
480
(1,979)
(372)
831
459
(2,837)
1,334
(1,503) $
-5.69%
3.66%
-2.14%
1.98%
47.02%
(132)
5
(127)
(3,048)
446
(2,602)
(976)
1,420
444
(4,156)
1,871
(2,285)
32.82%
4.49%
-1.15%
2.36%
45.02%
299
54,061
21,448
75,808
$
387
57,971
38,587
96,945
-95.5%
360.0%
-113.4%
-19.3%
7.6%
-23.9%
-61.9%
-41.5%
3.4%
-31.7%
-28.7%
-34.2%
-117.3%
-18.4%
86.0%
-15.9%
4.4%
-22.7%
-6.7%
-44.4%
-21.8%
(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
67
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
Other repossessed assets
Non-performing assets to total assets, excluding acquired loans with
deteriorated credit quality (including those by analogy)
Non-performing assets to total capital
December 31,
2018
(Dollars in thousands)
2017
Variance
(%)
$
$
$
41,679 $
78,047
25,354
74,360
64.4%
5.0%
4,302
541
124,569 $
33,768
2,986
161,323 $
6,704
2,528
108,946
44,174
3,548
156,668
2.76%
2.95%
16.13%
16.58%
-35.8%
-78.6%
14.3%
-23.6%
-15.8%
3.0%
-6.4%
-2.7%
2018
Year Ended December 31,
2017
(In thousands)
2016
Interest that would have been recorded in the period if the
loans had not been classified as non-accruing loans
$
3,338
$
3,181
2,917
68
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
69
December 31,
2018
2017
(Dollars in thousands)
Variance
%
-0.6%
20.4%
30.4%
218.9%
15.9%
-25.2%
-70.6%
11.7%
-44.8%
14.3%
$
$
63,717 $
42,456
3,354
13,494
123,021
950
398
200
1,548
124,569 $
51.1%
34.1%
2.7%
10.8%
0.8%
0.3%
0.2%
100.0%
64,085
35,253
2,572
4,232
106,142
1,270
1,355
179
2,804
108,946
58.7%
32.4%
2.4%
3.9%
1.2%
1.2%
0.2%
100.0%
3.30%
3.34%
-1.2%
2.13%
12.46%
2.05%
11.53%
3.9%
8.1%
1.16%
35.30%
1.15%
34.49%
0.87%
2.3%
59.20%
57.69%
2.6%
120.67%
134.26%
-10.1%
TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET
FDIC indemnification asset:
Balance at beginning of period
Shared-loss agreements reimbursements from the FDIC
Increase in expected credit losses to be
covered under shared-loss agreements, net
FDIC indemnification asset benefit (expense)
Net expenses incurred under shared-loss agreements
Shared-loss termination settlement
Balance at end of period
2018
Year Ended December 31,
2017
(In thousands)
2016
$
$
- $
-
-
-
-
-
- $
14,411 $
-
-
1,403
-
(15,814)
-
22,599
(1,573)
3,391
(8,040)
(1,966)
-
14,411
TABLE 14 - ACTIVITY IN THE REMAINING FDIC INDEMNIFICATION ASSET DISCOUNT
2018
Year Ended December 31
2017
(In thousands)
2016
Balance at beginning of year
Amortization of negative discount
Impact of lower projected losses
Shared-loss termination
Balance at end of year
$
$
- $
-
-
-
- $
8,670 $
-
-
(8,670)
- $
4,814
(8,040)
11,896
-
8,670
70
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,
Variance
$
2018
2017
(Dollars in thousands)
1,105,324 $
1,086,447
1,212,260
1,501,002
4,905,033
3,082
4,908,115
455,508
77,620
36,083
1,214
570,425
5,478,540
969,525
1,069,572
1,251,396
1,507,101
4,797,594
1,888
4,799,482
192,869
99,643
36,083
153
328,748
5,128,230
333
16,937
87,665
5,583,475 $
1,281
27,644
86,791
5,243,946
$
%
14.0%
1.6%
-3.1%
-0.4%
2.2%
63.2%
2.3%
136.2%
-22.1%
0.0%
693.5%
73.5%
6.8%
-74.0%
-38.7%
1.0%
6.5%
22.5%
22.1%
24.7%
30.7%
100.0%
79.9%
13.6%
0.2%
6.3%
100.0%
20.2%
22.3%
26.1%
31.4%
100.0%
58.7%
30.3%
0.0%
11.0%
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
$
$
$
454,723 $
192,500
357,086 $
393,133
457,053 $
606,210
71
Liabilities and Funding Sources
As shown in Table 15 above, at December 31, 2018, Oriental’s total liabilities were $5.583 billion, 6.5% more than the $5.244 billion
reported at December 31, 2017. Deposits and borrowings, Oriental’s funding sources, amounted to $5.479 billion at December 31,
2018 versus $5.128 billion at December 31, 2017, a 6.8% increase.
Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At December 31, 2018,
borrowings amounted to $570.4 million, representing an increase of 73.5% when compared with the $328.7 million reported at
December 31, 2017. The increase in borrowings reflects:
• An increase of $262.2 million in new repurchase agreements used for the purchase of investment securities during the year
ended December 31, 2018; and
• A decrease of $21.9 million in advances from the FHLB-NY attributable to $68.1 million of new advances, offset by the
maturing of $90.0 million of advances that were not renewed.
At December 31, 2018, deposits represented 88% and borrowings represented 12% of interest-bearing liabilities. At December 31,
2018, deposits, the largest category of Oriental’s interest-bearing liabilities, were $4.908 billion, an increase of 2.3% from $4.798
billion at December 31, 2017.
Stockholders’ Equity
At December 31, 2018, Oriental’s total stockholders’ equity was $999.9 million, a 5.8% increase when compared to $945.1 million at
December 31, 2017. This increase in stockholders’ equity reflects increases in retained earnings of $52.2 million, legal surplus of $8.7
million, reduction in treasury stock, at cost, of $869 thousand, partially offset by a decrease in accumulated other comprehensive loss,
net of tax of $8.0 million. Book value per share was $17.90 at December 31, 2018 compared to $17.73 at December 31, 2017.
From December 31, 2017 to December 31, 2018, tangible common equity to total assets increased from 11.12% to 12.59%, leverage
capital ratio increased from 13.92% to 14.22%, common equity tier 1 capital ratio increased from 14.59% to 16.78%, tier 1 risk-based
capital ratio increased from 19.05% to 19.20%, and total risk-based capital ratio increased from 20.34% to 20.48%. The increase in
these ratios reflect an increase of $54.8 million in total capital.
On October 22, 2018, Oriental announced the mandatory conversion of its Series C Preferred Stock into common stock. Each share of
Series C Preferred Stock was converted into 86.4225 shares of common stock. There were 84,000 shares of Series C Preferred Stock
outstanding, all of which were converted to common. Upon conversion, the Series C Preferred Stock is no longer outstanding and all
rights with respect to the Series C Preferred Stock have ceased and terminated, except the right to receive the number of whole shares
of common stock issuable upon conversion of the Series C Preferred Stock and any required cash-in-lieu of fractional shares.
Capital Rules to Implement Basel III Capital Requirements
Oriental and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The
current risk-based capital standards applicable to Oriental and the Bank (“Basel III capital rules”), which have been effective since
January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the
Basel Committee on Banking Supervision. As of December 31, 2018, the capital ratios of Oriental and the Bank continue to exceed
the minimum requirements for being “well-capitalized” under the Basel III capital rules.
The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage
capital as of December 31, 2018 and December 31, 2017, are calculated based on the Basel III capital rules related to the measurement
of capital, risk-weighted assets and average assets.
72
The following are the consolidated capital ratios of Oriental under the Basel III capital rules at December 31, 2018 and December 31,
2017:
TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA
December 31,
Variance
2018
2017
%
(Dollars in thousands, except per
share data)
$
999,877 $
945,107
5.8%
16.78%
4.50%
811,707 $
217,675 $
90,698 $
503,334 $
4,837,214 $
19.20%
6.00%
928,577 $
290,233 $
638,344 $
4,837,214 $
20.48%
8.00%
990,499 $
386,977 $
603,522 $
4,837,214 $
14.22%
4.00%
928,577 $
261,125 $
667,452 $
12.59%
17.13%
15.19%
20.67%
14.59%
4.50%
644,804
198,930
55,258
390,615
4,420,667
19.05%
6.00%
842,133
265,240
576,893
4,420,667
20.34%
8.00%
899,258
353,653
545,604
4,420,667
13.92%
4.00%
842,133
242,057
600,076
11.12%
15.57%
15.27%
21.38%
15.0%
0.0%
25.9%
9.4%
64.1%
28.9%
9.4%
0.8%
0.0%
10.3%
9.4%
10.7%
9.4%
0.7%
0.0%
10.1%
9.4%
10.6%
9.4%
2.2%
0.0%
10.3%
7.9%
11.2%
13.2%
10.0%
-0.5%
-3.3%
51,293,924
17.90 $
16.15 $
16.46 $
844,298 $
43,947,442
17.73
15.67
9.40
413,106
16.7%
0.9%
3.1%
75.1%
104.4%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
73
Common dividend data:
Cash dividends declared
Cash dividends declared per share
Payout ratio
Dividend yield
Year Ended December 31,
Variance
%
2017
(Dollars in thousands)
2016
2018
$
$
11,511 $
0.25 $
16.45%
1.52%
10,553
0.24
27.91%
2.55%
9.1% $
4.2% $
-41.1%
-40.4%
10,544
0.24
23.30%
1.83%
The following table presents a reconciliation of Oriental’s total stockholders’ equity to tangible common equity and total assets to
tangible assets at December 31, 2018, and 2017:
December 31,
2018
2017
Total stockholders' equity
Preferred stock
Preferred stock issuance costs
Goodwill
Core deposit intangible
Customer relationship intangible
Total tangible common equity (non-GAAP)
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
$
$
$
$
(In thousands, except share or per
share information)
999,877 $
(92,000)
10,130
(86,069)
(2,480)
(888)
828,570 $
945,107
(176,000)
10,130
(86,069)
(3,339)
(1,348)
688,481
6,189,053
(86,069)
(3,339)
(1,348)
6,098,297
11.29%
43,947,442
15.67
6,583,352
(86,069)
(2,480)
(888)
6,493,915 $
12.76%
51,293,924
16.15 $
The tangible common equity ratio and tangible book value per common share are non-GAAP measures and, unlike tier 1 capital and
common equity tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the
tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to
compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures
should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance
with GAAP. Moreover, the manner in which Oriental calculates its tangible common equity, tangible assets and any other related
measures may differ from that of other companies reporting measures with similar names.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. To mitigate
these limitations, Oriental has procedures in place to calculate these measures using the appropriate GAAP or regulatory components.
Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have
limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under
GAAP.
74
The following table presents Oriental’s capital adequacy information under the Basel III 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:
December 31,
2018
2017
(Dollars in thousands)
Variance
%
$
$
$
$
811,707 $
116,870
928,577
61,922
990,499 $
644,804
197,329
842,133
57,125
899,258
4,641,998 $
195,216
4,249,042
171,625
25.9%
-40.8%
10.3%
8.4%
10.1%
9.2%
13.7%
4,837,214 $
4,420,667
9.4%
Common equity tier 1 capital (minimum required - 4.5%)
Tier 1 capital (minimum required - 6%)
Total capital (minimum required - 8%)
Leverage ratio (minimum required - 4%)
Equity to assets
Tangible common equity to assets
16.78%
19.20%
20.48%
14.22%
15.19%
12.59%
14.59%
19.05%
20.34%
13.92%
15.27%
11.12%
15.0%
0.8%
0.7%
2.2%
-0.5%
13.2%
75
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, 2018 and 2017:
December 31,
2018
(Dollars in thousands)
2017
Variance
%
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 (1.875% at
December 31, 2018 - 1.25% at December 31, 2017)
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%)
18.40%
$ 887,918 $
$ 217,120 $
$
90,467 $
$ 313,618 $
18.40%
$ 887,918 $
$ 289,494 $
$ 385,992 $
19.68%
$ 949,596 $
$ 385,992 $
$ 482,490 $
13.68%
$ 887,918 $
$ 259,547 $
$ 324,434 $
18.63%
822,776
198,712
55,198
287,028
18.63%
822,776
264,949
353,265
19.92%
879,648
353,265
441,581
13.63%
822,776
241,417
301,771
-1.2%
7.9%
9.3%
63.9%
9.3%
-1.2%
7.9%
9.3%
9.3%
-1.2%
8.0%
9.3%
9.3%
0.4%
7.9%
7.5%
7.5%
76
Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At December 31, 2018 and
2017, Oriental’s market capitalization for its outstanding common stock was $844.3 million ($16.46 per share) and $413.1 million
($9.40 per share), respectively.
The following table provides the high and low prices and dividends per share of Oriental’s common stock for each quarter of the last
three calendar years:
2018
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
2017
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
2016
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Price
High
Low
Cash
Dividend
Per share
$
$
$
$
$
$
$
$
$
$
$
$
18.56 $
17.60 $
14.75 $
12.05 $
10.25 $
10.40 $
12.03 $
13.80 $
14.30 $
11.09 $
9.14 $
7.32 $
14.93 $
14.45 $
10.60 $
8.60 $
7.90 $
8.40 $
9.19 $
10.90 $
9.56 $
8.07 $
6.32 $
4.77 $
0.07
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.06
0.06
Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $7.7 million of its outstanding
shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. There were no
repurchases during 2018.
At December 31, 2018, the number of shares that may yet be purchased under such program is estimated at 469,675 and was
calculated by dividing the remaining balance of $7.7 million by $16.46 (closing price of Oriental's common stock at December 31,
2018).
77
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated financial statements, Oriental has certain obligations and commitments to make future
payments under contracts. At December 31, 2018, the aggregate contractual obligations and commercial commitments, excluding
accrued interest 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
(In thousands)
3 - 5 years
After 5 years
$
454,723 $
77,444
35,000
264,723 $
33,572
-
190,000 $
8,867
-
- $
35,005
-
24,412
1,501,004
5,618
850,451
$ 2,092,583 $ 1,154,364 $
7,653
573,537
780,057 $
11,141
77,016
123,162 $
-
-
35,000
-
-
35,000
Loan commitments, which represent unused lines of credit, increased to $541.4 million at December 31, 2018 as compared to
$485.0 million in December 31, 2017, while letters of credit provided to customers, decreased to $340 thousand as compared to $494
thousand at December 31, 2017. Commitments to extend credit are agreements to lend to customers as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may
require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent
future cash requirements. Oriental evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Oriental upon extension of credit, is based on management’s credit evaluation of the customer.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been
prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such
prices are affected by inflation.
78
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
March 31,
2018
June 30,
2018
September
30,
2018
(In thousands, except per share data)
December 31,
2018
Total
2018
$
83,170 $
9,176
73,994
15,460
88,006 $
10,418
77,588
14,747
94,137 $
11,860
82,277
14,601
95,106 $
13,071
82,035
11,300
360,419
44,525
315,894
56,108
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
$
58,534
18,514
52,121
24,927
8,010
16,917
(3,465)
13,452 $
62,841
18,703
52,300
29,244
9,595
19,649
(3,465)
16,184 $
67,676
18,620
50,941
35,355
12,255
23,100
(3,466)
19,634 $
70,735
24,258
51,719
43,274
18,530
24,744
(1,628)
23,116 $
259,786
80,095
207,081
132,800
48,390
84,410
(12,024)
72,386
PER SHARE DATA:
Basic
Diluted
$
$
0.31 $
0.30 $
0.36 $
0.35 $
0.45 $
0.42 $
0.47 $
0.45 $
1.58
1.52
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
(Loss) income before taxes
Income tax expense (benefit)
Net (loss) income
Less: dividends on preferred stock
(Loss) income available to common
shareholders
$
$
March 31,
2017
June 30,
2017
September
30,
2017
December 31,
2017
Total
2017
(In thousands, except per share data)
86,178 $
11,560
74,618
17,654
85,940 $
10,377
75,563
26,536
90,355 $
9,877
80,478
44,042
83,174 $
9,661
73,513
24,907
345,647
41,475
304,172
113,139
56,964
19,074
51,684
24,354
9,204
15,150
(3,465)
49,027
24,886
52,816
21,097
3,993
17,104
(3,466)
36,436
17,912
50,469
3,879
560
3,319
(3,465)
48,606
16,815
46,662
18,759
1,686
17,073
(3,466)
191,033
78,687
201,631
68,089
15,443
52,646
(13,862)
11,685 $
13,638 $
(146) $
13,607 $
38,784
PER SHARE DATA:
Basic
Diluted
$
$
0.27 $
0.26 $
0.30 $
0.30 $
- $
- $
0.31 $
0.30 $
0.88
0.88
79
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Background
Oriental’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through
the adoption of a risk management program, which is overseen and monitored by the Chief Risk and Compliance Officer, the Board’s
Risk and Compliance Committee and the executive Risk and Compliance Team. Oriental has continued to refine and enhance its risk
management program by strengthening policies, processes and procedures necessary to maintain effective risk management.
All aspects of Oriental’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to
risk management. As more fully discussed below, Oriental’s primary risk exposures include, market, interest rate, credit, liquidity,
operational and concentration risks.
Market Risk
Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices.
Oriental evaluates market risk together with interest rate risk. Oriental’s financial results and capital levels are constantly exposed to
market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by Oriental complies
with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the
Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and
finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by Oriental is within the parameters established
in such policies.
Interest Rate Risk
Interest rate risk is the exposure of Oriental’s earnings or capital to adverse movements in interest rates. It is a predominant market
risk in terms of its potential impact on earnings. Oriental manages its asset/liability position in order to limit the effects of changes in
interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.
In executing its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and
prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the
investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and
any tax or regulatory issues which may be pertinent to these areas.
On a quarterly basis, Oriental performs a net interest income simulation analysis on a consolidated basis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon,
assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous
interest rate movements are also modeled. Simulations are carried out in two ways:
(i) using a static balance sheet as Oriental had on the simulation date, and
(ii) using a dynamic balance sheet based on recent growth patterns and business strategies.
The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest
yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future
funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may
be important in projecting the future growth of net interest income.
Oriental uses a software application to project future movements in Oriental’s balance sheet and income statement. The starting point
of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.
80
These simulations are complex, and use many assumptions that are intended to reflect the general behavior of Oriental over the period
in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these
simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following
table presents the results of the simulations at December 31, 2018 for the most likely scenario, assuming a one-year time horizon:
Net Interest Income Risk (one-year projection)
Growing Simulation
Static Balance Sheet
Percent
Amount
Percent
Amount
Change
Change
Change
Change
(Dollars in thousands)
$
$
$
$
11,424
5,750
(5,643)
(11,330)
3.63% $
1.83% $
-1.79% $
-3.60% $
12,683
6,381
(6,271)
(12,584)
3.99%
2.01%
-1.97%
-3.96%
Change in interest rate
+ 200 Basis points
+ 100 Basis points
- 100 Basis points
- 200 Basis points
Future net interest income could be affected by Oriental’s investments in callable securities, prepayment risk related to mortgage loans
and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter
into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of Oriental’s assets and
liabilities, Oriental has executed certain transactions which include extending the maturity and the re-pricing frequency of the
liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to
hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-
NY as of December 31, 2018.
Oriental maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate
sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest
margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged
fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of
this variability in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are
linked to the forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a
prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue
risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset
by Oriental’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of
interest rate fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities,
respectively, will increase or decrease.
Derivative instruments that are used as part of Oriental’s interest risk management strategy include interest rate swaps, forward-
settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and
liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based
on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or
sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the
option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some
purchased option contracts give Oriental the right to enter into interest rate swaps and cap and floor agreements with the writer of the
option. In addition, Oriental enters into certain transactions that contain embedded derivatives. When the embedded derivative
possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is
bifurcated and carried at fair value. Please refer to Note 12 to the accompanying consolidated financial statements for further
information concerning Oriental’s derivative activities.
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Following is a summary of certain strategies, including derivative activities, currently used by Oriental to manage interest rate risk:
Interest rate swaps — Oriental entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted
wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowing transactions
occurred, the interest rate swap effectively fixes Oriental’s interest payments on an amount of forecasted interest expense attributable
to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative asset of $14 thousand (notional amount of
$34.0 million) was recognized at December 31, 2018 related to the valuation of these swaps.
In addition, Oriental has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are
utilized to convert certain variable-rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which Oriental
enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are
marked to market through earnings. At December 31, 2018, interest rate swaps offered to clients not designated as hedging
instruments represented a derivative asset of $126 thousand (notional amounts of $12.5 million), and the mirror-image interest rate
swaps in which Oriental entered into represented a derivative liability of $126 thousand (notional amounts of $12.5 million).
Wholesale borrowings — Oriental uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the
FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix Oriental’s interest payments on these
borrowings. As of December 31, 2018, Oriental had $34.0 million in interest rate swaps at an average rate of 2.4% designated as cash
flow hedges for $34.0 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis.
Credit Risk
Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in
accordance with its terms. The principal source of credit risk for Oriental is its lending activities. In Puerto Rico, Oriental’s principal
market, economic conditions are very challenging, as they have been for the last twelve years, due to a shrinking population, a
protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis,
and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico
government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board
for Puerto Rico. In addition, as was demonstrated with hurricanes Irma and Maria during the month of September 2017, Puerto Rico is
susceptible to natural disasters, such as hurricanes and earthquakes, which can have a disproportionate impact on Puerto Rico because
of the logistical difficulties of bringing relief to an island far from the United States mainland. Moreover, the Puerto Rico
government's fiscal challenges and Puerto Rico's unique relationship with the United States also complicate any relief efforts after a
natural disaster. These events increase credit risk as debtors may no longer be capable of operating their businesses and the collateral
securing Oriental's loans may suffer significant damages.
Oriental manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring
and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. Oriental also employs
proactive collection and loss mitigation practices.
Oriental may also encounter risk of default in relation to its securities portfolio. The securities held by Oriental are all agency
mortgage-backed securities. Thus, these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full
faith and credit of the U.S. government.
Oriental’s executive Credit Risk Team, composed of its Chief Operating Officer, Chief Risk and Compliance Officer, and other senior
executives, has primary responsibility for setting strategies to achieve Oriental’s credit risk goals and objectives. Those goals and
objectives are set forth in Oriental’s Credit Policy as approved by the Board.
82
Liquidity Risk
Liquidity risk is the risk of Oriental not being able to generate sufficient cash from either assets or liabilities to meet obligations as
they become due without incurring substantial losses. The Board has established a policy to manage this risk. Oriental’s cash
requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and
funding of new and existing investments as required.
Oriental’s business requires continuous access to various funding sources. While Oriental is able to fund its operations through
deposits as well as through advances from the FHLB-NY and other alternative sources, Oriental’s business is dependent upon other
external wholesale funding sources. Oriental has selectively reduced its use of certain wholesale funding sources, such as repurchase
agreements and brokered deposits. As of December 31, 2018, Oriental had $454.7 million in repurchase agreements, excluding
accrued interest, and $525.1 million in brokered deposits.
Brokered deposits are typically offered through an intermediary to small retail investors. Oriental’s ability to continue to attract
brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities
markets, Oriental’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are
generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered
deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based
on small differences in interest rates offered on deposits.
Although Oriental expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such
financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative
developments occur with respect to Oriental, the availability and cost of Oriental’s funding sources could be adversely affected. In that
event, Oriental’s cost of funds may increase, thereby reducing its net interest income, or Oriental may need to dispose of a portion of
its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse
accounting consequences upon any such dispositions. Oriental’s efforts to monitor and manage liquidity risk may not be successful to
deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by Oriental or
market-related events. In the event that such sources of funds are reduced or eliminated, and Oriental is not able to replace these on a
cost-effective basis, Oriental may be forced to curtail or cease its loan origination business and treasury activities, which would have a
material adverse effect on its operations and financial condition.
As of December 31, 2018, Oriental had approximately $447.0 million in unrestricted cash and cash equivalents, $637.5 million in
investment securities that are not pledged as collateral, and $762.0 million in borrowing capacity at the FHLB-NY.
Operational Risk
Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All
functions, products and services of Oriental are susceptible to operational risk.
Oriental faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and
financial products and services. Coupled with external influences such as the risk of natural disasters, market conditions, security
risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk,
Oriental has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and
manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide
reasonable assurance that Oriental’s business operations are functioning within established limits.
Oriental classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For
business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and
assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, Oriental has
specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology,
Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices
specific to the needs of the business groups. All these matters are reviewed and discussed in the executive Risk and Compliance Team.
Oriental also has a Business Continuity Plan to address situations where its capacity to perform critical functions is affected. Under
such circumstances, a Crisis Management Team is activated to restore such critical functions within established timeframes.
83
Oriental is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly
increasing over the last several years. Oriental has established and continues to enhance procedures based on legal and regulatory
requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. Oriental has
a corporate compliance function headed by a Chief Risk and Compliance Officer who reports to the Chief Executive Officer and
supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and Compliance Officer is responsible for the
oversight of regulatory compliance and implementation of a company-wide compliance program, including the Bank Secrecy
Act/Anti-Money Laundering compliance program.
Concentration Risk
Substantially all of Oriental’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a
consequence, Oriental’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse
political, fiscal or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in
loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the
value of its loans and loan servicing portfolio.
84
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, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31,
2018, 2017, and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2018, 2017, and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016
Notes to the Consolidated Financial Statements
Note 1– Summary of Significant Accounting Policies
Note 2 – Significant events
Note 3 – Restricted Cash
Note 4 – Investment Securities
Note 5 – Pledged Assets
Note 6 – Loans
Note 7 – Allowance for Loan and Lease Losses
Note 8 – FDIC Indemnification Asset and True-up Payment Obligation and FDIC Shared-loss
Expense
Note 9 – Foreclosed Real Estate
Note 10 – Premises and Equipment
Note 11 – Servicing Assets
Note 12 – Derivatives
Note 13 – Accrued Interest Receivable and Other Assets
Note 14 – Deposits and Related Interest
Note 15 – Borrowings and Related Interest
Note 16 – Offsetting of Financial Assets and Liabilities
Note 17 – Employee Benefit Plan
Note 18 – Related Party Transactions
Note 20 – Regulatory Capital Requirements
Note 21 – Equity- Based Compensation Plan
Note 22 – Stockholders’ Equity
Note 23 – Accumulated Other Comprehensive Income
Note 24 – Earnings per Common Share
Note 25 – Guarantees
Note 26 – Commitments and Contingencies
Note 27 – Fair Value of Financial Instruments
Note 28 – Banking and Financial Service Revenues
Note 29 – Business Segments
Note 30 – OFG Bancorp (Holding Company Only) Financial Information
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OFG Bancorp
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and stockholders of OFG Bancorp:
The management of OFG Bancorp ("Oriental") is responsible for establishing and maintaining effective internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of internal
control over financial reporting. Oriental’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Oriental’s internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Oriental;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of
Oriental are being made only in accordance with authorization of management and directors of Oriental; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
Oriental’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of Oriental’s internal
control over financial reporting as of December 31, 2018. Management made its assessment using the criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
Criteria”).
Based on its assessment, management has concluded that Oriental maintained effective internal control over financial reporting as of
December 31, 2018 based on the COSO Criteria.
The effectiveness of Oriental’s internal control over financial reporting as of December 31, 2018, has been audited by KPMG LLP,
Oriental’s independent registered public accounting firm, as stated in their report dated March 8, 2019.
By: /s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
Date: March 8, 2019
By: /s/ Maritza Arizmendi
Maritza Arizmendi
Executive Vice President and Chief Financial Officer
Date: March 8, 2019
86
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements and the related notes (collectively, the consolidated financial
statements) of OFG Bancorp and subsidiaries as listed in the accompanying index. In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 8, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.
/s/ KPMG LLP
San Juan, Puerto Rico
March 8, 2019
Stamp No. E363705 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
87
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on Internal Control Over Financial Reporting
We have audited OFG Bancorp and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2018 and 2017, the related
consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our
report dated March 8, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
88
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
San Juan, Puerto Rico
March 8, 2019
Stamp No. E363704 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report
89
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2018 AND 2017
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 $647 (December 31, 2017
- $647)
Investment securities available-for-sale, at fair value, with amortized cost of
$854,511 (December 31, 2017 - $648,800)
Investment securities held-to-maturity, at amortized cost, with fair value of
$410,353 (December 31, 2017 - $497,681)
Federal Home Loan Bank (FHLB) stock, at cost
Other investments
Total investments
Loans:
Loans held-for-sale, at lower of cost or fair value
Loans held for investment, net of allowance for loan and lease losses of $164,231
(December 31, 2017 - $167,509)
Total loans
Other assets:
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
December 31,
2018
2017
(In thousands)
$
$
442,103
4,930
447,033
3,030
478,182
7,021
485,203
3,030
360
191
841,857
645,797
424,740
12,644
3
1,279,604
506,064
13,995
3
1,166,050
10,368
12,272
4,421,226
4,431,594
4,044,057
4,056,329
33,768
34,254
113,763
68,892
16,937
10,716
347
86,069
57,345
44,174
49,969
127,421
67,860
27,663
9,821
771
86,069
64,693
Total assets
$
6,583,352
$
6,189,053
The accompanying notes are an integral part of these consolidated financial statements
90
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2018 AND 2017 (CONTINUED)
December 31,
2018
2017
(In thousands)
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 26)
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000
shares of Series D issued and outstanding
(December 31, 2017 - 1,340,000 shares; 1,380,000 shares; and 960,000
shares) $25 liquidation value
84,000 shares of Series C issued and outstanding at December 31, 2017
$1,000 liquidation value
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares
issued: 51,293,924 shares outstanding (December 31, 2017 - 52,625,869;
43,947,442)
Additional paid-in capital
Legal surplus
Retained earnings
Treasury stock, at cost, 8,591,310 shares (December 31, 2017 - 8,678,427 shares)
Accumulated other comprehensive (loss), net of tax of $1,677 (December 31, 2017 - $564)
Total stockholders’ equity
$
$
2,191,802
1,212,259
1,504,054
4,908,115
455,508
77,620
36,083
1,214
570,425
333
16,937
87,665
5,583,475
92,000
-
59,885
619,381
90,167
253,040
(103,633)
(10,963)
999,877
2,039,126
1,251,398
1,508,958
4,799,482
192,869
99,643
36,083
153
328,748
1,281
27,644
86,791
5,243,946
92,000
84,000
52,626
541,600
81,454
200,878
(104,502)
(2,949)
945,107
Total liabilities and stockholders’ equity
$
6,583,352
$
6,189,053
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, 2018, 2017 AND 2016
2018
Year Ended December 31,
2017
(In thousands, except per share data)
2016
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
FDIC shared-loss benefit, net
Net gain on:
Sale of securities
Derivatives
Early extinguishment of debt
Other non-interest income
Total non-interest income, net
$
321,381 $
31,190
7,848
360,419
312,421 $
26,994
6,232
345,647
32,953
7,794
1,875
1,903
44,525
315,894
56,108
259,786
43,638
25,934
4,767
74,339
30,298
7,223
2,398
1,556
41,475
304,172
113,139
191,033
39,468
25,790
4,050
69,308
321,945
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
-
1,403
(13,581)
-
-
-
5,756
80,095
6,896
132
(80)
1,028
78,687
12,207
(71)
(12,000)
6,163
66,819
The accompanying notes are an integral part of these consolidated financial statements
92
OFG BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (CONTINUED)
2018
Year Ended December 31,
2017
(In thousands, except per share data)
2016
Non-interest expense:
Compensation and employee benefits
Occupancy and equipment
Electronic banking charges
Professional and service fees
Taxes, other than payroll and income taxes
Credit related expenses
Information technology expenses
Insurance
Advertising, business promotion, and strategic initiatives
Loan servicing and clearing expenses
Loss on sale of foreclosed real estate and other repossessed assets
Communication
Printing, postage, stationary and supplies
Director and investor relations
Other
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Less: dividends on preferred stock
Income (loss) available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding and equivalents
Cash dividends per share of common stock
$
$
$
$
76,524
33,084
21,234
12,442
9,017
8,890
8,227
6,249
5,084
4,810
4,662
3,447
2,217
1,089
10,105
207,081
132,800
48,390
84,410
(12,024)
72,386 $
1.59 $
1.52 $
51,349
0.25 $
79,751
32,557
19,322
12,406
9,187
7,992
8,010
5,223
5,616
4,693
4,634
3,415
2,437
1,072
5,316
201,631
68,089
15,443
52,646
(13,862)
38,784 $
0.88 $
0.88 $
51,096
0.24 $
76,761
30,300
20,707
12,235
9,782
10,267
7,116
9,109
5,485
8,247
10,282
3,379
2,558
1,087
8,675
215,990
85,180
25,994
59,186
(13,862)
45,324
1.03
1.03
51,088
0.24
The accompanying notes are an integral part of these consolidated financial statements
93
OFG BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
$
Net income
Other comprehensive loss before tax:
Unrealized (loss) gain on securities available-for-sale
Realized gain on investment securities included in net income
Other-than-temporary impairment included in net income
Unrealized gain on cash flow hedges
Other comprehensive loss before taxes
Income tax effect
Other comprehensive loss after taxes
Comprehensive income
$
2018
Year Ended December 31,
2017
(In thousands)
2016
84,410 $
52,646 $
59,186
(9,651)
-
-
524
(9,127)
1,113
(8,014)
76,396 $
2,276
(6,896)
-
494
(4,126)
(419)
(4,545)
48,101 $
(5,023)
(12,207)
-
3,303
(13,927)
1,526
(12,401)
46,785
The accompanying notes are an integral part of these consolidated financial statements
94
OFG BANCORP
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
Preferred stock:
Balance at beginning of year
Year Ended December 31,
2018
2017
2016
(In thousands)
$
176,000 $
176,000 $
176,000
Conversion of convertible preferred stock into common stock
(84,000)
-
-
Balance at end of year
Common stock:
Balance at beginning of year
Conversion of convertible preferred stock into common stock
Balance at end of year
Additional paid-in capital:
Balance at beginning of year
Stock-based compensation expense
92,000
176,000
176,000
52,626
7,259
59,885
52,626
-
52,626
52,626
-
52,626
541,600
1,401
540,948
1,109
540,512
1,270
Stock-based compensation excess tax benefit recognized in income
-
(99)
-
Lapsed restricted stock units
Conversion of convertible preferred stock into common stock
Balance at end of year
Legal surplus:
Balance at beginning of year
Transfer from retained earnings
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Transfer to legal surplus
Balance at end of year
Treasury stock:
Balance at beginning of year
Lapsed restricted stock units
Balance at end of year
Accumulated other comprehensive loss, net of tax:
Balance at beginning of year
Other comprehensive loss, net of tax
Balance at end of year
Total stockholders’ equity
(361)
76,741
619,381
81,454
8,713
90,167
200,878
84,410
(11,511)
(12,024)
(8,713)
253,040
(358)
-
541,600
76,293
5,161
81,454
177,808
52,646
(10,553)
(13,862)
(5,161)
200,878
(834)
-
540,948
70,435
5,858
76,293
148,886
59,186
(10,544)
(13,862)
(5,858)
177,808
(104,502)
869
(103,633)
(104,860)
358
(104,502)
(105,379)
519
(104,860)
(2,949)
(8,014)
(10,963)
999,877 $
1,596
(4,545)
(2,949)
945,107 $
13,997
(12,401)
1,596
920,411
$
The accompanying nots are an integral part of these consolidated financial statements
95
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
Year Ended December 31,
2017
2018
2016
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred loan origination fees and fair value premiums on acquired
loans
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 (benefit) expense
Depreciation and amortization of premises and equipment
Deferred income tax expense, net
Provision for loan and lease losses
Stock-based compensation
Stock-based compensation excess tax benefit recognized in income
(Gain) loss on:
Sale of loans
Derivatives
Sale of securities
Early extinguishment of debt
Foreclosed real estate and other repossessed assets
Sale of other assets
Sale of other repossesed assets
Originations of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net (increase) decrease in:
Trading securities
Accrued interest receivable
Servicing assets
Other assets
Net (decrease) in:
Accrued interest on deposits and borrowings
Accrued expenses and other liabilities
Net cash provided by operating activities
(In thousands)
$
84,410 $
52,646 $
59,186
4,605
3,537
3,548
5,753
1,319
-
-
8,898
14,772
56,108
1,401
-
(301)
-
-
-
3,405
(107)
1,257
(95,520)
27,757
(169)
15,715
(895)
5,486
1,489
(2,028)
133,355
7,865
1,473
-
(1,403)
8,986
(3,658)
113,139
1,109
(99)
(955)
(103)
(6,896)
80
4,964
(539)
57
(116,020)
75,637
156
(29,742)
37
13,675
(937)
28,431
151,440
8,540
1,677
340
13,581
9,420
23,226
65,076
1,270
-
(1,570)
181
(12,207)
12,000
11,934
12
(1,623)
(179,430)
69,862
(59)
410
(2,403)
(7,941)
(862)
4,344
78,512
The accompanying notes are an integral part of these consolidated financial statements
96
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (CONTINUED)
2018
Year Ended December 31,
2017
(In thousands)
2016
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-sale
Premises and equipment
Origination and purchase of loans, excluding loans held-for-sale
Principal repayment of loans
Repayments to FDIC on shared-loss agreements
Additions to premises and equipment
Net change in restricted cash
Net cash (used in) provided by investing activities
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
Restricted units lapsed
Dividends paid on preferred stock
Dividends paid on common stock
Net cash provided by (used in) financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash 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
Conversion of convertible preferred stock into common stock
$
$
$
$
$
$
$
(271,639)
-
(113,731)
120,709
77,583
115,082
17,837
51,057
-
1,668
(1,315,906)
840,064
-
(11,491)
-
(488,767)
100,147
262,223
(20,816)
-
508
(12,024)
(12,796)
317,242
$
(38,170)
488,233
450,063 $
41,318 $
17,778
$
74,630 $
47,084
$
5,795 $
1,247
$
84,000 $
(182,054)
-
(31,950)
105,169
88,726
28,748
256,996
40,051
-
569
(801,766)
699,409
(10,125)
(6,469)
-
187,304
125,991
(459,815)
(5,741)
-
-
(13,862)
(10,553)
(363,980)
$
(25,236)
513,469
488,233 $
40,570 $
30
$
74,919 $
43,163
$
33,647 $
293
$
- $
(119,544)
(86,478)
(20,421)
145,512
101,965
30,411
300,483
47,507
123,137
48
(768,353)
817,199
1,573
(5,297)
319
568,061
(61,078)
(292,264)
(228,633)
(66,550)
(315)
(13,862)
(10,141)
(672,843)
(26,270)
539,739
513,469
56,302
10,051
112,071
45,538
123,137
182
-
97
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (CONTINUED)
Financed sales of foreclosed real estate
Loans booked under the GNMA buy-back option
Interest capitalized on loans subject to the temporary payment moratorium
$
$
$
2,333
$
13,325 $
-
$
1,113
$
8,268 $
39,701
$
2,212
9,681
-
The accompanying notes are an integral part of these consolidated financial statements
98
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of OFG Bancorp (Oriental) conform with GAAP and to banking industry practices. The following is a
description of Oriental’s most significant accounting policies:
Nature of Operations
Oriental is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. Oriental
operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental
Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), and a
retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). Oriental also has a special purpose entity, Oriental
Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and their respective divisions, Oriental provides
a wide range of banking and financial services such as commercial, consumer and mortgage lending, leasing, auto loans, financial
planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual
trust services.
The main offices of Oriental and its subsidiaries are located in San Juan, Puerto Rico, except for OPC, which is located in Boca Raton,
Florida. Oriental is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”) under the U.S. Bank Holding Company Act of 1956, as amended, and the Dodd-Frank Act.
The Bank is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of
Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation ( “FDIC”). The Bank offers banking services such as
commercial and consumer lending, leasing, auto loans, savings and time deposit products, financial planning, and corporate and
individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. The
Bank has an operating subsidiary, OFG USA, which is a commercial lender organized in Delaware and based in Cornelius, North
Carolina. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas, a division of the
Bank, are international banking entities licensed pursuant to the International Banking Center Regulatory Act of Puerto Rico, as
amended. OIB and Oriental Overseas offer the Bank certain Puerto Rico tax advantages. Their activities are limited under Puerto Rico
law to persons located in Puerto Rico with assets/liabilities located outside of Puerto Rico.
Oriental Financial Services is a securities broker-dealer and is subject to the supervision, examination and regulation of the Financial
Industry Regulatory Authority (“FINRA”), the SEC, and the OCFI. Oriental Financial Services is also a member of the Securities
Investor Protection Corporation. Oriental Insurance is an insurance agency and is subject to the supervision, examination and
regulation of the Office of the Commissioner of Insurance of Puerto Rico.
Oriental’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly in the secondary market or the securitization
of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”) insured and
Veterans Administration (“VA”) guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage
Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary
market. Conventional loans that meet the underwriting requirements for sale or exchange under certain Federal National Mortgage
Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs are referred to as conforming mortgage
loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of
FNMA and FHLMC mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is also an approved
issuer of GNMA mortgage-backed securities. The Bank is the master servicer of the GNMA, FNMA and FHLMC pools that it issues
and of its mortgage loan portfolio, and has a subservicing arrangement with a third party for a portion of its acquired loan portfolio.
During 2016, Oriental began servicing most of its mortgage loan portfolio.
On December 18, 2012, Oriental purchased from Banco Bilbao Vizcaya Argentaria, S. A. (“BBVA”), all of the outstanding common
stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya Argentaria
Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), a subsidiary
offering insurance services, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA Securities”), a registered broker-dealer. This
transaction is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank, BBVA Seguros and BBVA
Securities are collectively referred to as the “BBVAPR Companies” or “BBVAPR.”
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Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OFG Bancorp and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation. The Statutory Trust II is exempt from the consolidation
requirements of GAAP.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to
the determination of the allowance for loan and lease losses, the valuation of securities and derivative instruments, revisions to
expected cash flows in acquired loans, the determination of income taxes, other-than-temporary impairment of securities, and
goodwill valuation and impairment assessment.
Cash Equivalents
Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or
less at the date of acquisition.
Earnings per Common Share
Basic earnings per share is calculated by dividing income available to common shareholders (net income reduced by dividends on
preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of
basic earnings per share except that the weighted average of common shares is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common shares underlying stock options and restricted units had
been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock
splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements.
Securities Purchased/Sold Under Agreements to Resell/Repurchase
Oriental purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements
represent short-term loans and are reflected as assets in the consolidated statements of financial condition. It is Oriental’s policy to
take possession of securities purchased under resale agreements while the counterparty retains effective control over the securities.
Oriental monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and
requests additional collateral when deemed appropriate.
Oriental also sells securities under agreements to repurchase the same or similar securities. Oriental retains effective control over the
securities sold under these agreements. Accordingly, such agreements are treated as financing arrangements, and the obligations to
repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the
asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral.
Investment Securities
Securities are classified as held-to-maturity, available-for-sale or trading. Securities for which Oriental has the intent and ability to
hold until maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity
because of interest rate changes to meet liquidity needs or to better match the repricing characteristics of funding sources are classified
as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported
net of tax in other comprehensive income (loss).
Oriental classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future.
These securities are carried at fair value with realized and unrealized changes in fair value included in earnings in the period in which
the changes occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental’s investment in the Federal Home Loan Bank of New York (“FHLB-NY”) stock, a restricted security, has no readily
determinable fair value and can only be sold back to the FHLB-NY at cost. Therefore, these stock shares are deemed to be
nonmarketable equity securities and are carried at cost.
Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized
gains or losses on sales of investment securities and unrealized gains and losses valuation adjustments considered other than
temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statements of
operations. The cost of securities sold is determined by the specific identification method.
Financial Instruments
Certain financial instruments, including derivatives, trading securities and investment securities available-for-sale, are recorded at fair
value and unrealized gains and losses are recorded in other comprehensive income (loss) or as part of non-interest income, as
appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined
based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are
derived from pricing models that consider current market and contractual prices for the underlying financial instruments as the well as
time value and yield curve or volatility factors underlying the positions.
Oriental determines the fair value of its financial instruments based on the fair value measurement framework, which establishes a fair
value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 — Level 1 assets and liabilities include equity securities that are traded in an active exchange market. Valuations are
obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair
value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt
securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and
financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models
for which the determination of fair value requires significant management judgment or estimation.
There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring
basis during the years ended December 31, 2018, 2017, and 2016. Oriental’s policy is to recognize transfers at the date of the event or
change in circumstances that caused the transfer.
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Impairment of Investment Securities
Oriental conducts periodic reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary
impairment. Oriental separates the amount of total impairment into credit and noncredit-related amounts. The term “other-than-
temporary impairment” is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term
recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying
value of the investment. Any portion of a decline in value associated with a credit loss is recognized in income, while the remaining
noncredit-related component is recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the
amortized cost basis of the security will be recovered by comparing it to the present value of cash flows expected to be collected from
the security discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The
shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the
“credit loss.”
Oriental’s review for impairment generally entails, but is not limited to:
• the identification and evaluation of investments that have indications of possible other-than-temporary impairment;
• the analysis of individual investments that have fair values less than amortized cost, including consideration of the length of
time the investment has been in an unrealized loss position, and the expected recovery period;
• the financial condition of the issuer or issuers;
• the creditworthiness of the obligor of the security;
• actual collateral attributes;
• any rating changes by a rating agency;
• current analysts’ evaluations;
• the payment structure of the debt security and the likelihood of the issuer being able to make payments;
• current market conditions;
• adverse conditions specifically related to the security, industry, or a geographic area;
• Oriental’s intent to sell the debt security;
• whether it is more-likely-than-not that Oriental will be required to sell the debt security before its anticipated recovery; and
• other qualitative factors that could support or not an other-than-temporary impairment.
Derivative Instruments and Hedging Activities
Oriental’s overall interest rate risk-management strategy incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate sensitivity by
modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not,
on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets
and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability
in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are linked to the
forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a prudent method of
managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by
changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by Oriental’s
gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate
fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will
increase or decrease.
Derivative instruments that are used as part of Oriental’s interest rate risk-management strategy include interest rate swaps, caps,
forward-settlement swaps, and futures contracts. Interest rate swaps generally involve the exchange of fixed and variable-rate interest
payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve
exchange-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent
contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified
price within a specified period. Some purchased option contracts give Oriental the right to enter into interest rate swaps and cap and
floor agreements with the writer of the option. In addition, Oriental enters into certain transactions that contain embedded derivatives.
When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic
characteristics of the host contract, it is bifurcated and carried at fair value.
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When using derivative instruments, Oriental exposes itself to credit and market risk. If a counterparty fails to fulfill its performance
obligations under a derivative contract due to insolvency or any other event of default, Oriental’s credit risk will equal the fair value
gain in a derivative plus any cash or securities that may have been delivered to the counterparty as part of the transaction terms.
Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes Oriental, thus creating a
repayment risk for Oriental. This risk is generally mitigated by requesting cash or securities from the counterparty to cover the
positive fair value. When the fair value of a derivative contract is negative, Oriental owes the counterparty and, therefore, assumes no
credit risk other than to the extent that the cash or value of the collateral delivered as part of the transactions exceeds the fair value of
the derivative. Oriental minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-
quality counterparties.
Oriental uses forward-settlement swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings
attributable to changes in LIBOR. Once the forecasted wholesale borrowing transactions occur, the interest rate swap will effectively
lock-in Oriental’s interest rate payments on an amount of forecasted interest expense attributable to the one-month LIBOR
corresponding to the swap notional amount. By employing this strategy, Oriental minimizes its exposure to volatility in LIBOR.
As part of this hedging strategy, Oriental formally documents all relationships between hedging instruments and hedged items, as the
well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all
derivatives that are designated as cash flow hedges to (i) specific assets and liabilities on the balance sheet or (ii) specific firm
commitments or forecasted transactions. Oriental also formally assesses (both at the hedge’s inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash
flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The changes in fair
value of the forward-settlement swaps are recorded in accumulated other comprehensive income (loss) to the extent there is no
significant ineffectiveness.
Oriental discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting
changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the
derivative expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur; (iv) a
hedged firm commitment no longer meets the definition of a firm commitment; or (v) management determines that designating the
derivative as a hedging instrument is no longer appropriate or desired.
Oriental’s derivative activities are monitored by its Asset/Liability Management Committee which is also responsible for approving
hedging strategies that are developed through its analysis of data derived from financial simulation models and other internal and
industry sources. The resulting hedging strategies are then incorporated into Oriental’s overall interest rate risk-management.
Off-Balance Sheet Instruments
In the ordinary course of business, Oriental enters into off-balance sheet instruments consisting of commitments to extend credit,
further discussed in Note 26 hereto. Such financial instruments are recorded in the financial statements when these are funded or
related fees are incurred or received. Oriental periodically evaluates the credit risks inherent in these commitments and establishes
accruals for such risks if and when these are deemed necessary.
Mortgage Banking Activities and Loans Held-For-Sale
The residential mortgage loans reported as held-for-sale are stated at the lower of cost or fair value, cost being determined on the
outstanding loan balance less unearned income, and fair value determined in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific
identification method. Loans held-for-sale include all conforming mortgage loans originated and purchased, which from time to time
Oriental sells to other financial institutions or securitizes conforming mortgage loans into GNMA, FNMA and FHLMC pass-through
certificates.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
Oriental recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. Oriental is not engaged in sales of mortgage loans and
mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result
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of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale
transactions.
The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in
which Oriental surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in Accounting
Standards Codification ("ASC") Topic 860 are met: (i) the assets must be isolated from creditors of the transferor, (ii) the transferee
must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity. When Oriental transfers financial assets and the transfer fails any one of these criteria, Oriental is prevented
from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto
Rico income tax purposes, Oriental treats the transfers of loans which do not qualify as “true sales” under the applicable accounting
guidance, as sales, recognizing a deferred tax asset or liability on the transaction. For transfers of financial assets that satisfy the
conditions to be accounted for as sales, Oriental derecognizes all assets sold; recognizes all assets obtained and liabilities incurred in
consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value
assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of
financial assets requires a true sale analysis of the treatment of the transfer under state law as if Oriental was a debtor under the
bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the intent of the parties, the nature and
level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is
never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as
the unsettled state of the common law. Once the legal isolation test has been met, other factors concerning the nature and extent of the
transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is
warranted.
When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the
characteristics of the loans sold. Conforming conventional mortgage loans are combined into pools which are exchanged for FNMA
and GNMA mortgage-backed securities, which are generally sold to private investors, or sold directly to FNMA or other private
investors for cash. To the extent the loans do not meet the specified characteristics, investors are generally entitled to require Oriental
to repurchase such loans or indemnify the investor against losses if the assets do not meet certain guidelines. GNMA programs allow
financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for
which Oriental provides servicing. At Oriental’s option and without GNMA prior authorization, Oriental may repurchase such
delinquent loans for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a
conditional option until the delinquency criteria is met, at which time the option becomes unconditional. When the loans backing a
GNMA security are initially securitized, Oriental treats the transaction as a sale for accounting purposes because the conditional
nature of the buy-back option means that Oriental does not maintain effective control over the loans, and therefore these are
derecognized from the statement of financial condition. When individual loans later meet GNMA’s specified delinquency criteria and
are eligible for repurchase, Oriental is deemed to have regained effective control over these loans, and these must be brought back
onto Oriental’s books as assets, regardless of whether Oriental intends to exercise the buy-back option. Quality review procedures are
performed by Oriental as required under the government agency programs to ensure that asset guideline qualifications are met.
Oriental has not recorded any specific contingent liability in the consolidated financial statements for these customary representation
and warranties related to loans sold by Oriental, and management believes that, based on historical data, the probability of payments
and expected losses under these representation and warranty arrangements is not significant.
Oriental has liability for residential mortgage loans sold subject to credit recourse, principally loans associated with FNMA residential
mortgage loan sales and securitization programs. In the event of any customer default, pursuant to the credit recourse provided,
Oriental is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount
of future payments that Oriental would be required to make under the recourse arrangements in the event of nonperformance by the
borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if
applicable. In the event of nonperformance by the borrower, Oriental has rights to the underlying collateral securing the mortgage
loan. Oriental suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted
mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of
holding and disposing the related property. Oriental has established a liability to cover the estimated credit loss exposure related to
loans sold with credit recourse.
The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit
recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item
"mortgage banking activities" in the consolidated statements of operations) throughout the life of the loan, as necessary, when
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the
recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience,
foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate
the recourse liability. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of
default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days
delinquent within the following twelve-month period.
Servicing Assets
Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an
obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is
recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans.
Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately
compensate Oriental for its expected cost.
All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value
measurement method, Oriental measures servicing rights at fair value at each reporting date and reports changes in fair value of
servicing asset in the statement of operations in the period in which the changes occur, and includes these changes, if any, with
mortgage banking activities in the consolidated statement of operations. The fair value of servicing rights is subject to fluctuations as a
result of changes in estimated and actual prepayment speeds and default rates and losses.
The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs,
and other economic factors, which are determined based on current market conditions.
Loans and Leases
Originated and Other Loans and Leases Held in Portfolio
Loans that Oriental originates and intends to hold in portfolio are stated at the principal amount outstanding, adjusted for unamortized
deferred fees and costs which are amortized to interest income over the expected life of the loan using the interest method. Oriental
discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if Oriental does not
expect the full collection of principal or interest. The delinquency status is based upon the contractual terms of the loans.
Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted
for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until
interest is received on a current basis and other factors indicative of doubtful collection cease to exist. The determination as to the
ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial
condition and prospects for repayment.
Oriental follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide
for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan and lease
losses charged to current operations is based on such methodology. Loan and lease losses are charged, and recoveries are credited to
the allowance for loan and lease losses on originated and other loans.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where
appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, and legal options available to Oriental.
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Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current
information and events, it is probable that Oriental will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the
fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of
small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the
lower of cost or fair value. Oriental measures for impairment all commercial loans over $250 thousand (i) that are either over 90 days
past due or adversely classified, (ii) that are troubled-debt restructurings (each, a "TDR”), or (iii) when deemed necessary by
management. The portfolios of mortgage loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated
collectively for impairment.
Oriental uses a rating system to apply an overall allowance percentage to each originated and other loan portfolio segment based on
historical credit losses adjusted for current conditions and trends. The historical loss experience is determined by portfolio segment
and is based on the actual loss history experienced by Oriental over a determined look back period for each segment. The actual loss
factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is
supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include
consideration of the following: the credit grading assigned to commercial loans; levels of and trends in delinquencies and impaired
loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection
and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last
examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory
requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and
collateral value. An additional impact from the historical loss experience is applied based on levels of delinquency, loan
classification, FICO score and/or origination date, depending on the portfolio.
At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market.
Loans that will be held in Oriental’s portfolio are carried at amortized cost. Residential mortgage loans held for sale are recorded at
the lower of the aggregate cost or market value (“LOCOM”).
Acquired Loans and Leases
Loans that Oriental acquires in acquisitions are recorded at fair value with no carryover of the related allowance for loan losses.
Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be
collected on the loans and discounting those cash flows at a market rate of interest.
Oriental has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted
Eurobank acquisition in April 2010. For each acquisition, Oriental considered the following factors as indicators that an acquired loan
had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:
• Loans that were 90 days or more past due;
• Loans that had an internal risk rating of substandard or worse (substandard is consistent with regulatory definitions and is
defined as having a well-defined weakness that jeopardizes liquidation of the loan);
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and
• Loans that had been previously modified in a TDR.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees and other costs).
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Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660
acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660
were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that
any differences between the contractually required loan payments in excess of Oriental’s initial investment in the loans be accreted
into interest income on a level-yield basis over the life of the loan. Loans acquired in the BBVAPR Acquisition that were accounted
for under the provisions of ASC 310-20 which had fully amortized their premium or discount, recorded at the date of acquisition, are
removed from the acquired loan category. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in
accordance with Oriental’s non-accruing policy and any accretion of discount is discontinued. These assets were recorded at estimated
fair value on their acquisition date, incorporating an estimate of future expected cash flows. Such fair value includes a credit discount
which accounts for expected loan losses over the estimated life of these loans. Management takes into consideration this credit
discount when determining the necessary allowance for acquired loans that are accounted for under the provisions of ASC 310-20.
The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated
and other loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Oriental performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. Oriental determined
that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the
valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit
losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the
amounts of contractually required principal and interest that Oriental did not expect to collect as of the acquisition date. Based on the
guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired
pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount
attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value.
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as
the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred
over the life of the acquired loans. Subsequent decreases to the expected cash flows require Oriental to evaluate the need for an
addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated
allowance for loan losses, if any and the reversal of a corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
Oriental’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the
acquired loans to date and Oriental’s best estimates for the expected lifetime credit performance of the loans using currently available
information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the
fair value adjustment.
In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount
of cash flows expected to be collected. Oriental performs such an evaluation on a quarterly basis on both its acquired loans
individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy.
Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this
evaluation, a determination is made as to whether or not Oriental has a reasonable expectation about the timing and amount of cash
flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that
incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with
consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated
historical loss data and are applied to each pool.
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To the extent that Oriental cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for
loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as Oriental can reasonably
estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest in Oriental’s financial statement disclosures, regardless
of whether or not Oriental expects any principal or interest cash flows on an individual loan 90 days or more past due.
Oriental writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
Effective February 6, 2017, Oriental and the FDIC agreed to terminate the loss and recovery sharing agreements in connection with a
portfolio of loans acquired in the Eurobank FDIC assisted transaction.
Allowance for Loan and Lease Losses
Oriental follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide
for inherent losses in loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans.
Oriental’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC
Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, Oriental determines the allowance for loan losses on
purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in
expected cash flows after the acquisition date.
The loss factor used for the general reserve of these loans is established considering Oriental’s historical loss experience adjusted for
an estimated loss emergence period and the consideration of environmental factors. Environmental factors considered are: change in
non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes in collateral values;
changes in risk selections and underwriting standards, and other changes in lending policies, procedures and practices; experience,
ability and depth of lending management and other relevant staff, including Oriental’s loan review system; national and local
economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of
estimated credit losses. The sum of the adjusted loss experience factors and the environmental factors will be the general valuation
reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each category.
Originated and Other Loans and Leases Held for Investment and Acquired Loans Accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Oriental determines the allowance for loan and lease losses by portfolio segment, which consist of mortgage loans, commercial loans,
consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan
modification programs and home equity secured personal loans. Traditional mortgage loans include loans secured by a dwelling,
fixed coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules
and loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being
serviced under such programs. Home equity loans are mainly equity lines of credit. The allowance factor on mortgage loans is
impacted by the adjusted historical loss factors on the sub-segments and the environmental risk factors described above and by
delinquency buckets. The traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets.
Effective on the fourth quarter of 2018, the calculation of the loss factor was changed from historical loss experience to a probability
of default (“PD”) and loss given default (“LGD”) methodology. The PD results from a delinquency migration analysis and the LGD
is based on the Bank’s historical loss experience. The segments and sub-segments remained unchanged as well as the environmental
risk factors adjustments. These changes are considered a change in accounting estimate as per ASC 250-10 provisions, where
adjustments should be made prospectively.
Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail,
floor plan, and real estate) and by collateral type (secured by real estate and other commercial and industrial assets). The loss factor
used for the GVA of these loans is established considering Oriental's past 36-month historical loss experience of each segment
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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. The allowance factor is impacted by the adjusted historical loss factor and the environmental risk factors. For the
determination of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by
delinquency bucket.
Oriental establishes its allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of
the loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss
experience, and other factors that warrant recognition in determining our allowance for loan losses. Oriental continues to monitor and
modify the level of the allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
Our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on
specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with
similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective
loan types.
When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest
due under the original terms of a business or commercial real estate loan greater than $500 thousand, such loan will be classified as
impaired. Additionally, all loans modified in a TDR are considered impaired. The need for specific valuation allowances are
determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral,
less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in
determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off
immediately.
Loan loss ratios and credit risk categories, for commercial loans, are updated at least quarterly and are applied in the context of
GAAP. Management uses current available information in estimating possible loan and lease losses, factors beyond Oriental’s control,
such as those affecting general economic conditions, may require future changes to the allowance.
Acquired Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30, our allowance for loan losses is estimated based upon our expected cash
flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in the net
present value of our expected cash flows (which are used as a proxy to identify probable incurred losses) subsequent to the acquisition
of the loans, an allowance for loan losses is established based on our estimate of future credit losses over the remaining life of the
loans.
Acquired loans accounted for under ASC Subtopic 310-30 are not considered non-performing and continue to have an accretable yield
as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-
off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs on loans
accounted under ASC Subtopic 310-30 are recorded only to the extent that losses exceed the non-accretable difference established
with purchase accounting.
For the principal enhancements management made to its methodology, refer to Note 7.
Troubled Debt Restructuring
A TDR is the restructuring of a receivable in which Oriental, as creditor, grants a concession for legal or economic reasons due to the
debtor’s financial difficulties. A concession is granted when, as a result of the restructuring, Oriental does not expect to collect all
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amounts due, including interest accrued at the original contract rate. These concessions may include a reduction of the interest rate,
principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses.
To assess whether the debtor is having financial difficulties, Oriental evaluates whether it is probable that the debtor will default on
any of its debt in the foreseeable future.
Receivables that are restructured in a TDR are presumed to be impaired and are subject to a specific impairment-measurement
method. If the payment of principal at original maturity is primarily dependent on the value of collateral, Oriental considers the current
value of that collateral in determining whether the principal will be paid. For non-collateral dependent loans, the specific reserve is
calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate. An accruing loan that is
modified in a TDR can remain in accrual status if, based on a current, well-documented credit analysis, collection of principal and
interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical
repayment performance for a reasonable period before the modification.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable
losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of financial condition. The
determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities. Net adjustments to the
reserve for unfunded commitments are included in other operating expenses in the consolidated statements of operations.
FDIC Indemnification Asset and True-up Payment Obligation
The FDIC indemnification asset was accounted for and measured separately from the covered loans acquired in the FDIC-assisted
acquisition as it was not contractually embedded in any of the covered loans. The indemnification asset was recorded at fair value at
the acquisition date and represented the present value of the estimated cash payments expected to be received from the FDIC for
future losses on covered assets based on the credit adjustment estimated for each covered asset and the shared-loss percentages. This
balance also included incurred expenses under the shared-loss agreements. These cash flows were then discounted at a market-based
rate to reflect the uncertainty of the timing and receipt of the shared-loss reimbursements from the FDIC. The time value of money
incorporated into the present value computation was accreted into earnings over the shorter of the life of the shared-loss agreements or
the holding period of the covered assets.
The FDIC indemnification asset was reduced as shared-loss payments were received from the FDIC. Realized credit losses in excess
of acquisition-date estimates resulted in an increase in the FDIC indemnification asset. Conversely, if realized credit losses were less
than acquisition-date estimates, the FDIC indemnification asset was amortized through the term of the shared-loss agreements.
The true-up payment obligation associated with the loss share agreements was accounted for at fair value in accordance with ASC
Section 805-30-25-6 as it was considered contingent consideration. The true-up payment obligation was included as part of other
liabilities in the consolidated statements of financial condition. Any changes in the carrying value of the obligation were included in
the category of FDIC loss share income (expense) in the consolidated statements of operations.
On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a
payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the
anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the
end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
Goodwill and Intangible Assets
Oriental’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles with
indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate
impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or
dispose of a reporting unit.
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Under applicable accounting standards, goodwill impairment analysis is a two-step test. Oriental has the option to first assess
qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value
of the reporting unit is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than its
carrying amount, or if Oriental chooses to bypass the qualitative assessment, Oriental compares each reporting unit's fair value to its
carrying value to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of
the reporting unit is not considered impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair
value, a second step would be performed that would compare the implied fair value of the reporting unit's goodwill with the carrying
amount. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business
combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting
units. Oriental performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing
basis. Oriental performed its annual impairment review of goodwill during the fourth quarter of 2018 and 2017 using October 31,
2018 and 2017 as the annual evaluation dates and concluded that there was no impairment at December 31, 2018 and 2017.
Foreclosed Real Estate and Other Repossessed Property
Foreclosed real estate and other repossessed property are initially recorded at the fair value of the real estate or repossessed property
less the cost of selling it at the date of foreclosure or repossession. At the time properties are acquired in full or partial satisfaction of
loans, any excess of the loan balance over the estimated fair value of the property is charged against the allowance for loan and lease
losses on non-covered loans. After foreclosure or repossession, these properties are carried at the lower of cost or fair value less
estimated cost to sell based on recent appraised values or options to purchase the foreclosed or repossessed property. Any excess of
the carrying value over the estimated fair value, less estimated costs to sell, is charged to non-interest expense. The costs and expenses
associated to holding these properties in portfolio are expensed as incurred.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over
the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method
over the terms of the leases or estimated useful lives of the improvements, whichever is shorter.
Impairment of Long-Lived Assets
Oriental periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected
to result from the use of the asset and its eventual disposition is made. If the sum of the future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. The amount of the impairment is the
excess of the carrying amount over the fair value of the asset. As of December 31, 2018 and 2017, there was no indication of
impairment as a result of such review.
Income Taxes
In preparing the consolidated financial statements, Oriental is required to estimate income taxes. This involves an estimate of current
income tax expense together with an assessment of deferred taxes resulting from differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax
expense involves estimates and assumptions that require Oriental to assume certain positions based on its interpretation of current tax
laws and regulations. Changes in assumptions affecting estimates may be required in the future, and estimated tax assets or liabilities
may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and
circumstances, such as the progress of tax audits, case law and emerging legislation. When particular matters arise, a number of years
may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a
reduction to Oriental’s effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the
effective tax rate and may require the use of cash in such year.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate
temporary differences. The carrying value of Oriental’s net deferred tax assets assumes that Oriental will be able to generate sufficient
future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, Oriental
may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the
consolidated statements of operations.
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Management evaluates on a regular basis whether the deferred tax assets can be realized and assesses the need for a valuation
allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its
deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in Oriental’s tax provision
in the period of change.
In addition to valuation allowances, Oriental establishes accruals for uncertain tax positions when, despite the belief that Oriental’s tax
return positions are fully supported, Oriental believes that certain positions are likely to be challenged. The accruals for uncertain tax
positions are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging
legislation. The accruals for Oriental’s uncertain tax positions are reflected as income tax payable as a component of accrued expenses
and other liabilities. These accruals are reduced upon expiration of the applicable statute of limitations.
Oriental follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Oriental’s policy is to include interest and penalties related to unrecognized income tax benefits within the provision for income taxes
on the consolidated statements of operations.
Oriental is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2014 to 2017, until the
applicable statute of limitations expires. In addition, Oriental’s US subsidiaries are potentially subject to income tax audits by the IRS
for taxable years 2015 to 2017. Tax audits by their nature are often complex and can require several years to complete.
Revenue Recognition
Refer to Note 28 for a detailed description of the Corporation’s policies on the recognition and presentation of revenues from contract
with customers.
Equity-Based Compensation Plan
Oriental’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and
further amended in 2010 and 2013.
The purpose of the Omnibus Plan is to provide flexibility to Oriental to attract, retain and motivate directors, officers, and key
employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation
practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high
levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an
“Award”) are intended to be based upon the recipient’s individual performance, corporate performance, level of responsibility and
potential to make significant contributions to Oriental. Generally, the Omnibus Plan will terminate as of (a) the date when no more of
Oriental’s shares of common stock are available for issuance under the Omnibus Plan or, (b) if earlier, the date the Omnibus Plan is
terminated by Oriental’s Board of Directors.
The Board’s Compensation Committee (the “Committee”), or such other committee as the Board may designate, has full authority to
interpret and administer the Omnibus Plan in order to carry out its provisions and purposes. The Committee has the authority to
determine those persons eligible to receive an Award and to establish the terms and conditions of any Award. The Committee may
delegate, subject to such terms or conditions or guidelines as it shall determine, to any employee or group of employees any portion of
its authority and powers under the Omnibus Plan with respect to participants who are not directors or executive officers subject to the
reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Only the
Committee may exercise authority in respect to Awards granted to such participants.
The expected term of stock options granted represents the period of time that such options are expected to be outstanding. Expected
volatilities are based on historical volatility of Oriental’s shares of common stock over the most recent period equal to the expected
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term of the stock options. For stock options issued during 2015, the expected volatilities are based on both historical and implied
volatility of Oriental’s shares of common stock.
Oriental follows the fair value method of recording stock-based compensation. Oriental used the modified prospective transition
method, which requires measurement of the cost of employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award with the cost to be recognized over the service period. It applies to all awards unvested and
granted after the effective date and awards modified, repurchased, or cancelled after that date.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other
events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that
recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities and on derivative activities that qualify and are designated for cash flows
hedge accounting, net of taxes, are reported as a separate component of the stockholders’ equity section of the consolidated statements
of financial condition, such items, along with net income, are components of comprehensive income (loss).
Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Subsequent Events
Oriental has evaluated other events subsequent to the balance sheet date and prior to the filing of this annual report on Form
10-K for the year ended December 31, 2018, 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
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate
as a Benchmark Interest Rate for Hedge Accounting Purposes: The amendments in this Update permit use of the OIS rate based on
SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate,
the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. The adoption of this will not have a
material impact on our consolidated financial statements and related disclosures as we continue to use LIBOR.
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). In
August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, which aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). Accordingly, ASU 2018-15 requires an entity (customer) in a hosting arrangement that is a service contract to
follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service
contract and which costs to expense. The ASU also requires the entity (customer) to expense the capitalized implementation costs of a
hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.
This ASU is the final version of Proposed Accounting Standards Update 2018–230—Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract, which has been deleted. This ASU will be applied prospectively for annual and interim periods in fiscal years
beginning after December 15, 2019. Early adoption is permitted. The adoption of this ASU will not have a material impact on our
consolidated financial statements and related disclosures.
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement. In August 2018, the FASB issued ASU 2018-13, which improves the effectiveness of fair value measurement
disclosures. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement,
based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial
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Statements, including the consideration of costs and benefits. This ASU is the final version of Proposed Accounting Standards Update
2015-350—Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurements, which has been deleted. This ASU will be applied prospectively for annual and interim periods in fiscal years
beginning after December 15, 2019. We assessed the impact that the adoption of ASU 2018-13 and it will not have a material impact
on our consolidated financial statements and related disclosures.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which simplifies the
measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill
impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting
unit. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. The
adoption of this ASU will not have a material impact on our consolidated financial statements and related disclosures as the carrying
amount of any of the reporting units do not exceeds its fair value, if exceeds Oriental would be required to record an impairment
charge for the difference up to the amount of the goodwill.
Measurement of Credit Losses on Financial Instruments. In December 18, 2018, a joint final rule was issued by the FRB, OCC and
FDIC, on the implementation and transition of the Current Expected Credit Loss methodology (CECL). The rule differentiates
implementation for Standardized and Advanced Approaches banks and has implications for business combinations and stress testing.
The rule is largely in line with the proposal from April 2018. In June 2016, the FASB issued ASU No. 2016-13, which includes an
impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred
losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU No. 2016-13 is
effective for fiscal years, and interim periods, beginning after December 15, 2019. Oriental will implement ASU No. 2016-13 on
January 1, 2020 using a modified retrospective approach. Although early adoption is permitted beginning in the first quarter of 2019,
Oriental does not expect to make that election. While we continue to assess the impact of ASU No. 2016-13, we have developed a
roadmap with time schedules in place from 2016 to implementation date. Oriental's cross-functional implementation team has
developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We recently have selected the
software and are in the process of assessing the methodology to be used in order to develop an acceptable model to estimate the
expected credit losses. After the model has been developed, reviewed and validated in accordance with our governance policies,
Oriental will keep disclosing relevant information of concerning implementation process and impact of ASU No. 2016-13, as well as
the updating of policies, procedures and internal controls. Although Oriental expects the allowance for credit losses to increase upon
adoption with a corresponding adjustment to retained earnings, the ultimate amount of the increase will depend on the portfolio
composition, credit quality, economic conditions and reasonable and supportable forecasts at that time.
Codification Improvements to Topic 326, Financial Instruments—Credit Losses: The amendments in this Update include items
brought to the Board’s attention by stakeholders. The amendments align the implementation date for non-public entities’ annual
financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the
amendments in Update 2016-13. The amendment clarifies that receivables arising from operating leases are not within the scope of
Subtopic 326-20. Impairment of receivables arising from operating leases will be accounted for in accordance with Topic 842, Leases.
Oriental does not estimate to have such impairment in the near future. The adoption of this will not have a material impact on our
consolidated financial statements and related disclosures.
Leases. In February 2016, the FASB issued ASU No. 2016-02, the FASB issued ASU No. 2016-02, which requires lessees to
recognize a right-of-use (ROU) asset and related lease liability for leases classified as operating leases at the commencement date that
have lease terms of more than 12 months. The standard, effective January 1, 2019, with early adoption permitted, would have caused
us to recognize virtually all leases on the Consolidated Balance Sheets upon adoption and in the comparative period. However, in July
2018, the FASB issued an update to its guidance providing companies with the option to adopt the provisions of the standard
prospectively without adjusting comparative periods; we will elect this option and adopt the standard on January 1, 2019. The new
standard provides a number of optional practical expedients in transition. We have elected the ‘package of practical expedients’, which
permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct
costs. We also have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that
qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for
existing short-term leases of those assets in transition. Oriental’s leases primarily consist of leased office space. Oriental expects to
recognized ROU assets and lease liabilities for operating leases in a range of $20 million to $25 million, with the most significant
impact from recognition of leased office space. No impact on equity, results of operations and cash flows.
Premium Amortization on Purchased Callable Debt Securities Receivables. In March 2017, the FASB issued ASU No. 2017-08,
which requires the amortization of the premium on callable debt securities to the earliest call date. The amortization period for callable
114
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
debt securities purchased at a discount would not be impacted by the ASU. This ASU will be applied prospectively for annual and
interim periods in fiscal years beginning after December 15, 2018. The ASU is not expected to have a material impact on Oriental's
consolidated financial position or results of operations. At December 31, 2018, Oriental does not have callable debt securities.
New Accounting Updates Adopted During the Current Year
Codification Improvements. In July 2018, the FASB issued ASU 2018-9, which represents changes to clarify the FASB Accounting
Standards Codification (the “Codification”), correct unintended application of guidance, or make minor improvements to the
Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost
to most entities. Some of the amendments make the Codification easier to understand and easier to apply by eliminating
inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. The transition and
effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not
require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have
transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The
Corporation does not expect to be materially impacted by these Codification improvements.
Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which amends Topic 230 (Statement of Cash Flows) and
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is intended to reduce diversity in practice in
how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No. 2016-18 is
effective for fiscal years, and interim periods, beginning after December 15, 2017. The standard requires application using a
retrospective transition method. The adoption of ASU No. 2016-18 on January 1, 2018, changed the presentation and classification of
restricted cash and restricted cash equivalents in our consolidated statements of cash flows.
Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition
requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 permits two
methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the
cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In
August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 by one year to fiscal years beginning
after December 15, 2017. Oriental has adopted this ASU on January 1, 2018 using the modified retrospective method. The adoption of
Topic 606 did not have material impact to the Company’s statement of operations or financial condition for the year ended December
31, 2018. No cumulative effect adjustment to accumulated deficit was recorded as a result of the adoption of Topic 606. Refer to
additional disclosures on Note 28, Banking and Financial Service Revenues.
115
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 2 – SIGNIFICANT EVENTS
Hurricanes Irma and Maria
During 2017, Oriental was impacted by hurricanes Irma and Maria, which struck the Island on September 7, 2017 and September 20,
2017, respectively. Hurricane Maria caused catastrophic damages throughout Puerto Rico, including homes, businesses, roads,
bridges, power lines, commercial establishments, and public facilities. It caused an unprecedented crisis when it ravaged the Island’s
electric power grid less than two weeks after hurricane Irma left over a million Puerto Rico residents without power. For several
months after the hurricanes, a large part of Puerto Rico was without electricity, many businesses were unable to operate, and
government authorities struggled to deliver emergency supplies and clean drinking water to many communities outside the San Juan
metropolitan area. Further, payment and delivery systems, including the U.S. Post Office, were unable to operate for weeks after
hurricane Maria.
Almost all of Oriental’s operations and clients are located in Puerto Rico. Although Oriental’s business operations were disrupted by
major damages to Puerto Rico’s critical infrastructure, including its electric power grid and telecommunications network, Oriental’s
digital channels, core banking and electronic funds transfer systems continued to function uninterrupted during and after the
hurricanes. Within days after hurricane Maria, and upon securing a continuing supply of diesel fuel for its electric power generators,
Oriental was able to open its main offices and many of its branches and ATMs in addition to its digital and phone trade channels.
As a result of this event and, based on current assessments of information available for the impact of the hurricanes on our credit
portfolio, 2017 results included an additional loan loss provision of $32.4 million.
Oriental implemented its disaster response plan as these storms approached its service areas. To operate in disaster response mode,
Oriental incurred expenses for, among other things, buying diesel and generators for electric power, debris removal, security
measures, property damage mitigation, and emergency communication with customers regarding the status of its banking operations.
The estimated total non-credit operating costs as of December 31, 2017 amounted to $6.6 million. No additional losses have been
incurred at December 31, 2018.
Oriental maintains insurance for casualty losses as well as for disaster response costs and certain revenue lost through business
interruption. Oriental received a $1.0 million partial payment from its insurance carrier during the year ended December 2017 and a
$6.25 million payment during the year ended December 31, 2018. At December 31, 2017, a receivable of $1.2 million was included in
other assets, the remaining $5 million was recognized as other non-interest income in the statement of operations during 2018.
116
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 3 – RESTRICTED CASH
The following table includes the composition of Oriental’s restricted cash:
Cash pledged as collateral to other financial institutions to secure:
Derivatives
Obligations under agreement of loans sold with recourse
December 31,
2018
2017
(In thousands)
$
$
1,980 $
1,050
3,030 $
1,980
1,050
3,030
At December 31, 2018, the Bank’s international banking entities, OIB and Oriental Overseas, a division of the Bank, held an
unencumbered certificate of deposit and other short-term highly liquid securities in the amount of $305 thousand and $325 thousand,
respectively, as the legal reserve required for international banking entities under Puerto Rico law. At December 31, 2017, the Bank’s
international banking entities, OIB and Oriental Overseas, a division of the Bank, held an unencumbered certificate of deposit and
other short-term highly liquid securities in the amount of $300 thousand and $325 thousand, respectively, as the legal reserve required
for international banking entities under Puerto Rico law. These instruments cannot be withdrawn or transferred by OIB or Oriental
Overseas without prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (the "OCFI").
As part of its derivative activities, Oriental has entered into collateral agreements with certain financial counterparties. At both
December 31, 2018 and 2017, Oriental had delivered approximately $2.0 million of cash as collateral for such derivatives activities.
Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At
both December 31, 2018 and 2017, Oriental delivered as collateral cash amounting to approximately $1.1 million.
The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those
minimum average reserve balances for the week that covered December 31, 2018 was $211.6 million (December 31, 2017 - $189.2
million). At December 31, 2018 and 2017, the Bank complied with this requirement. Cash and due from bank as well as other short-
term, highly liquid securities, are used to cover the required average reserve balances.
117
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 4 – INVESTMENT SECURITIES
Money Market Investments
Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or
less at the date of acquisition. At December 31, 2018 and 2017, money market instruments included as part of cash and cash
equivalents amounted to $4.9 million and $7.0 million, respectively.
Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at
December 31, 2018 and 2017 were as follows:
Amortized
Cost
Gross
Unrealized
Gains
December 31, 2018
Gross
Unrealized
Losses
(In thousands)
Fair
Value
Weighted
Average
Yield
561,878 $
211,947
66,230
404 $
1,050
-
8,951 $
2,827
2,166
553,331
210,170
64,064
2.59%
3.10%
1.90%
840,055
1,454
13,944
827,565
2.66%
10,924
2,325
1,207
14,456
-
-
15
15
119
60
-
179
10,805
2,265
1,222
14,292
854,511 $
1,469 $
14,123 $
841,857
1.36%
1.38%
2.99%
1.50%
2.64%
424,740 $
- $
14,387 $
410,353
2.07%
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
Other debt securities
Total investment securities
Total securities available
for sale
$
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates $
118
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amortized
Cost
Gross
Unrealized
Gains
December 31, 2017
Gross
Unrealized
Losses
(In thousands)
Fair
Value
Weighted
Average
Yield
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 $
383,194
166,436
$
$
1,402
1,486
82,026
-
631,656
2,888
10,276
2,927
2,455
1,486
17,144
-
-
-
52
52
$
2,881
584
1,955
5,420
113
48
362
-
523
381,715
167,338
80,071
629,124
10,163
2,879
2,093
1,538
16,673
648,800 $
2,940 $
5,943 $
645,797
2.39%
2.94%
1.90%
2.47%
1.25%
1.38%
5.55%
2.97%
2.04%
2.46%
506,064 $
- $
8,383 $
497,681
2.07%
The amortized cost and fair value of Oriental’s investment securities at December 31, 2018, by contractual maturity, are shown in the
next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the
period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
119
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Available-for-sale
Held-to-maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
(In thousands)
$
$
$
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates
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
Obligations of US government-sponsored agencies $
Other debt securities
Total due from 1 to 5 years
Due from 5 to 10 years
Other debt securities
Total due after 5 to 10 years
Total investment securities
Total
$
$
3,617 $
3,617
3,570 $
3,570
58,221 $
253,447
311,668
56,202 $
249,808
306,010
- $
-
- $
-
-
304,814 $
211,947
299,953 $
210,170
424,740 $
-
8,009
524,770
840,055
7,862
517,985
827,565
-
424,740
424,740
10,924 $
10,924
2,325 $
100
2,425
1,107
1,107
14,456
854,511 $
10,805 $
10,805
2,265 $
100
2,365
1,122
1,122
14,292
841,857 $
- $
-
- $
-
-
-
-
-
424,740 $
-
-
-
-
-
410,353
-
-
410,353
410,353
-
-
-
-
-
-
-
-
410,353
120
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the year ended December 31, 2018, Oriental retained securitized GNMA pools totaling $56.8 million amortized cost, at a yield
of 3.93% from its own originations while during the year ended December 31, 2017 that amount totaled $74.9 million amortized cost,
at a yield of 3.14%. During the year ended December 31, 2016, that amount totaled $112.2 million, amortized cost, at a yield of
2.89%.
During the year ended December 31, 2018, Oriental sold $17.8 million of available-for-sale Government National Mortgage
Association (“GNMA”) certificates from its recurring mortgage loan origination and securitization activities. These sales did not
realize any gains or losses during such period. During the year ended December 31, 2017, Oriental sold $166.0 million of mortgage-
backed securities and $84.1 million of US Treasury securities, and recorded a net gain on sale of securities of $6.9 million. During the
year ended December 31, 2016, Oriental sold $277.2 million 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.
Description
Sale of securities available-for-sale
Mortgage-backed securities
GNMA certificates
Total
Year Ended December 31, 2018
Book Value
at Sale
Gross Gains Gross Losses
Sale Price
(In thousands)
$
$
17,837 $
17,837 $
17,837 $
17,837 $
- $
- $
-
-
Year Ended December 31, 2017
Book Value
Description
Sale Price
at Sale
Gross Gains Gross Losses
(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
Investment securities
US Treasury securities
Total mortgage-backed securities
$
$
107,510 $
65,284
102,311 $
63,704
84,202
256,996 $
84,085
250,100 $
5,199 $
1,580
117
6,896 $
-
-
-
-
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 mortgage-backed securities
$
293,505 $
277,181 $
16,324 $
-
6,978
300,483 $
11,095
288,276 $
$
-
16,324 $
4,117
4,117
121
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables show Oriental’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-
maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss
position at December 31, 2018 and 2017:
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 Treasury Securities
Securities held to maturity
FNMA and FHLMC certificates
Securities available-for-sale
FNMA and FHLMC certificates
GNMA certificates
US Treasury Securities
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
Amortized
Cost
December 31, 2018
12 months or more
Unrealized
Loss
(In thousands)
Fair
Value
$
$
$
66,230 $
357,955
2,325
131,044
9,977
567,531 $
2,166 $
8,603
60
2,739
119
13,687 $
64,064
349,352
2,265
128,305
9,858
553,844
424,740 $
14,387 $
410,353
Less than 12 months
Amortized
Cost
Unrealized
Loss
(In thousands)
Fair
Value
109,772
17,126
323
127,221 $
$
348
88
-
436 $
109,424
17,038
323
126,785
Amortized
Cost
Total
Unrealized
Loss
(In thousands)
Fair
Value
$
$
$
66,230 $
467,727
2,325
148,170
10,300
694,752 $
2,166 $
8,951
60
2,827
119
14,123 $
64,064
458,776
2,265
145,343
10,181
680,629
424,740 $
14,387 $
410,353
122
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of US Government and sponsored agencies
Obligations of Puerto Rico government and public
instrumentalities
GNMA certificates
US Treasury Securities
Securities held to maturity
FNMA and FHLMC certificates
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
GNMA certificates
US Treasury 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 public
instrumentalities
Obligations of US government and sponsored agencies
GNMA certificates
US Treausury Securities
Securities held to maturity
FNMA and FHLMC certificates
December 31, 2017
12 months or more
Amortized
Cost
Unrealized
Loss
(In thousands)
Fair
Value
$
72,562 $
111,635
2,927
1,857 $
2,122
48
70,705
109,513
2,879
2,455
20,803
9,952
220,334 $
$
362
499
113
5,001 $
2,093
20,304
9,839
215,333
$
352,399
7,264
345,135
Less than 12 months
Amortized
Cost
Unrealized
Loss
(In thousands)
Fair
Value
9,464
125,107
14,001
324
148,896 $
98
759
85
-
942 $
9,366
124,348
13,916
324
147,954
153,665 $
1,119 $
152,546
$
$
Amortized
Cost
Total
Unrealized
Loss
(In thousands)
Fair
Value
82,026
236,742
1,955
2,881
2,455
2,927
34,804
10,276
369,230 $
362
48
584
113
5,943 $
80,071
233,861
2,093
2,879
34,220
10,163
363,287
506,064 $
8,383 $
497,681
$
$
123
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental performs valuations of the investment securities on a monthly basis. Moreover, Oriental conducts quarterly reviews to
identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in
value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component
recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the
security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the
rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of
the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-
temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In
addition, while Oriental believes that the methodology used to value these exposures is reasonable, the methodology is subject to
continuing improvement, including those made as a result of market developments. Consequently, it is reasonably possible that
changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the
future.
All of the investments ($1.1 billion, amortized cost) with an unrealized loss position at December 31, 2018 consist of securities issued
or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities that have a large
and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in market
conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.
The following table presents a rollforward of credit-related impairment losses recognized in earnings for the years ended December
31, 2018, 2017 and 2016 on available-for-sale securities:
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
$
$
2018
Year Ended December 31,
2017
(In thousands)
2016
- $
-
-
- $
- $
-
-
- $
1,490
(1,490)
-
-
\
124
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 5 - PLEDGED ASSETS
The following table shows a summary of pledged and not pledged assets at December 31, 2018 and 2017. 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
Bond for the Bank's trust operations
Puerto Rico public fund deposits
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
Total assets not pledged
$
$
$
December 31,
2018
2017
(In thousands)
487,181 $
423
322
141,162
629,088
205,484
1,478
341
22,948
230,251
880,591
971,772
275,451
651
140,123
416,225
1,925,904 $
637,509 $
354,868
1,414,054
373,814
1,148,535
3,928,780 $
305,346
993
150,036
456,375
1,658,398
921,610
325,698
1,152,151
361,497
949,650
3,710,606
125
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6 - LOANS
Oriental’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as
"originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between
acquired BBVAPR loans and acquired Eurobank loans.
126
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The composition of Oriental’s loan portfolio at December 31, 2018 and 2017 was as follows:
December 31,
2018
2017
(In thousands)
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 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
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
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
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
$
127
$
$
668,809
1,597,588
348,980
1,129,695
3,745,072
(95,188)
3,649,884
7,740
3,657,624
2,546
23,988
4,435
30,969
(2,062)
28,907
492,890
182,319
-
14,403
689,612
(42,010)
647,602
676,509
63,392
47,826
846
112,064
(24,971)
87,093
763,602
4,421,226
10,368
4,431,594
$
683,607
1,307,261
330,039
883,985
3,204,892
(92,718)
3,112,174
6,695
3,118,869
4,380
28,915
21,969
55,264
(3,862)
51,402
532,053
243,092
1,431
43,696
820,272
(45,755)
774,517
825,919
69,538
53,793
1,112
124,443
(25,174)
99,269
925,188
4,044,057
12,272
4,056,329
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As a result of the devastation caused by hurricanes Irma and Maria, Oriental offered an automatic three-month moratorium for the
payment due on certain loans. The level of delinquencies for mortgage and auto loans as of December 31, 2017 was impacted by the
loan moratorium. Aging of current and early delinquent loans in moratorium were frozen at September 30, 2017, throughout the
moratorium period. In addition, although the repayment schedule was modified as part of the moratorium, certain borrowers continued
to make payments shortly after the moratorium, having an impact on the respective delinquency status at December 31, 2017. At
December 31, 2018, all of the loan moratoriums have expired, and total delinquency levels have returned to pre-hurricane levels with
some improvements.
Originated and Other Loans and Leases Held for Investment
Oriental’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial,
consumer, and auto and leasing.
The tables below present the aging of the recorded investment in gross originated and other loans held for investment at December 31,
2018 and 2017, by class of loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers
of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option
(but not the obligation) to repurchase, even when they elect not to exercise that option.
128
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
30-59 Days 60-89 Days
Past Due Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
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, 2016, 2017
and 2018
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
77 $
91
-
255
1,516 $
2,412
552
1,693
2,707 $
5,632
3,531
5,074
4,300 $
8,135
4,083
7,022
36,344 $
67,707
35,004
49,213
40,644 $
75,842
39,087
56,235
255
253
-
931
-
10,793
11,724
1,059
328
483
8,043
116
6,258
14,417
6,677
8,697
1,462
33,780
3,085
19,389
56,254
7,991
9,278
52,781
104,429
60,772
113,707
1,945
42,754
3,201
36,440
82,395
139,500
484,978
11,072
70,393
566,443
141,445
527,732
14,273
106,833
648,838
168
-
-
-
56
270
-
494
-
2,223
2,717
9
-
-
9
241
250
-
-
11,733
-
14,417
19,721
75,975
19,721
102,125
-
566,684
19,721
668,809
-
2,717
-
-
-
1,641
-
-
1,641
-
-
917
571
-
1,488
3,129
-
-
1,430
463
-
-
1,893
-
-
-
546
-
546
2,439
-
1,200
5,202
8,570
-
-
14,972
-
-
6,020
817
46
6,883
21,855
-
1,200
6,632
10,674
-
-
18,506
-
-
6,937
1,934
46
8,917
27,423
289,052
68,413
200,831
213,440
4,184
19,009
794,929
179,885
156,410
81,030
308,278
49,633
775,236
1,570,165
289,052
69,613
207,463
224,114
4,184
19,009
813,435
179,885
156,410
87,967
310,212
49,679
784,153
1,597,588
-
-
-
-
-
-
-
-
-
-
-
-
-
-
129
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
Total Loans Accruing
Consumer
Credit cards
Overdrafts
Personal lines of credit
Personal loans
Cash collateral personal
loans
Auto and leasing
Total
$
725 $
10
57
3,966
363 $
-
11
1,740
411 $
-
22
1,262
1,499 $
10
90
6,968
26,535 $
204
1,827
296,151
28,034 $
214
1,917
303,119
74
339
3
416
15,280
15,696
4,832
58,094
77,788 $
$
2,453
27,945
47,254 $ 113,022 $ 238,064 $ 3,507,008 $ 3,745,072 $
348,980
1,129,695
339,997
1,030,162
1,698
13,494
8,983
99,533
-
-
-
-
-
-
-
2,717
130
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2017
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
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, 2016 and
2017
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
86 $
92
101
242
358
233
-
1,112
-
7,233
8,345
-
-
938 $
1,077
383
604
1,258
978
75
5,313
326
3,331
8,970
-
-
3,537 $
6,304
3,348
5,971
4,561 $
7,473
3,832
6,817
41,579 $
75,758
40,669
55,966
46,140 $
83,231
44,501
62,783
8,561
10,177
58,505
68,682
467
-
68
66
577
8,604
116,674
125,278
1,202
7,393
1,649
36,763
3,543
18,923
59,229
-
1,724
121,194
122,918
43,188
3,869
29,487
76,544
510,345
14,401
73,793
598,539
553,533
18,270
103,280
675,083
-
256
256
-
2,380
-
4,981
7,361
-
-
8,268
8,268
-
8,268
8,345
8,970
67,497
84,812
598,795
683,607
7,361
-
-
765
352
-
-
1,117
-
-
-
455
9
464
1,581
-
-
-
936
-
-
936
-
-
-
103
-
103
1,039
-
118
3,527
9,695
-
-
13,340
-
-
881
1,616
51
2,548
15,888
-
118
4,292
10,983
-
-
15,393
-
-
881
2,174
60
3,115
18,508
235,426
44,648
225,649
235,084
3,998
17,556
762,361
235,426
44,766
229,941
246,067
3,998
17,556
777,754
170,015
125,591
84,482
111,078
35,226
526,392
1,288,753
170,015
125,591
85,363
113,252
35,286
529,507
1,307,261
-
-
-
-
-
-
-
-
-
-
-
-
-
-
131
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2017
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
Total Loans Accruing
Consumer
Credit cards
Overdrafts
Personal lines of credit
Personal loans
Cash collateral personal
loans
Auto and leasing
Total
$
$
246 $
20
259
3,778
130 $
6
54
1,494
1,227 $
31
87
223
1,603 $
57
400
5,495
26,827 $
157
1,820
278,982
28,430 $
214
2,220
284,477
103
59
312
474
14,224
14,698
4,406
21,760
36,092 $
1,743
10,399
22,151 $
1,880
4,232
89,497 $ 147,740 $ 3,057,152 $ 3,204,892 $
322,010
847,594
330,039
883,985
8,029
36,391
-
-
-
-
-
-
-
7,361
At December 31, 2018 and 2017, Oriental had a carrying balance of $91.4 million and $94.9 million, respectively, in originated and
other loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and
municipalities as part of the institutional commercial loan segment. All originated and other loans granted to the Puerto Rico
government are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all
taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are
pledged for the payment of its general obligations.
Acquired Loans
Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20 (Non-
refundable fees and Other Costs). We have acquired loans in the acquisitions of BBVAPR and Eurobank.
Acquired BBVAPR Loans
Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660
acquired at a premium are accounted for under the guidance of ASC 310-20, which requires that any contractually required loan
payment receivable in excess of Oriental’s initial investment in the loans be accreted into interest income on a level-yield basis over
the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with
Oriental’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued. Acquired BBVAPR loans
that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting
period upon refinancing, renewal or normal re-underwriting.
132
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20
as of December 31, 2018 and 2017, by class of loans:
December 31, 2018
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
Total Loans Accruing
Commercial
Commercial secured by real
estate
Retail
Floor plan
$
Other commercial and industrial
Retail
Consumer
Credit cards
Personal loans
Auto
Total
$
- $
-
-
30
30
30
499
64
563
405
998 $
- $
-
-
54 $
888
942
11
11
11
8
8
950
54 $
- $
54 $
888
942
49
49
991
94
94
1,461
1,461
1,555
982
1,036
1,510
1,510
2,546
147
32
179
241
431 $
380
18
398
200
1,548 $
1,026
114
1,140
846
2,977 $
20,796
2,052
22,848
3,589
27,992 $
21,822
2,166
23,988
4,435
30,969 $
-
-
-
-
-
-
-
-
-
-
-
133
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2017
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days Total Past
Past Due
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
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
$
- $
-
-
- $
-
-
119 $
928
1,047
119 $
928
1,047
-
-
-
-
221
2
223
1,270
257
2
259
1,306
- $
119 $
393
393
2,681
-
2,681
3,074
1,321
1,440
2,938
2
2,940
4,380
127
61
188
248
436 $
1,310
45
1,355
179
2,804 $
1,645
245
1,890
1,029
4,225 $
24,822
2,203
27,025
20,940
51,039 $
26,467
2,448
28,915
21,969
55,264 $
36
-
36
36
208
139
347
602
985 $
-
-
-
-
-
-
-
-
-
-
-
-
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Acquired BBVAPR loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing auto
loans with FICO scores over 660 acquired at a premium, are accounted for by Oriental in accordance with ASC 310-30.
The carrying amount corresponding to acquired BBVAPR loans with deteriorated credit quality, including those accounted under ASC
310-30 by analogy, in the statements of financial condition at December 31, 2018 and 2017 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,
2018
2017
(In thousands)
1,304,545
345,423
959,122
269,510
689,612
42,010
647,602
$
$
1,481,616
352,431
1,129,185
308,913
820,272
45,755
774,517
$
$
134
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2018 and 2017, Oriental had $44.5 million and $50.3 million, respectively, in loans granted to Puerto Rico
municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30. These loans are primarily secured municipal
general obligations.
The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for
under ASC 310-30 for the years ended December 31, 2018, 2017 and 2016:
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer (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 accretable yield
Balance at end of year
Year Ended December 31, 2018
Mortgage
Commercial
Auto
Consumer
Total
(In thousands)
$ 258,498 $
(27,248)
-
949
$ 232,199 $
46,764 $
(14,160)
7,895
(3,991)
36,508 $
2,766 $
(2,360)
890
(1,053)
243 $
885 $ 308,913
(44,639)
(871)
9,269
484
(4,033)
62
560 $ 269,510
$ 299,501 $
(6,665)
(949)
$ 291,887 $
10,596 $
(4,241)
3,991
10,346 $
23,050 $
142
1,053
24,245 $
19,284 $ 352,431
(11,041)
4,033
18,945 $ 345,423
(277)
(62)
Year Ended December 31, 2017
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
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
$
$
$
$
292,115 $
(30,205)
2
(3,414)
258,498 $
50,366 $
(20,572)
22,250
(5,280)
46,764 $
8,538 $
(6,339)
170
397
2,766 $
3,682 $
(1,841)
143
(1,099)
885 $
354,701
(58,957)
22,565
(9,396)
308,913
305,615 $
(9,528)
3,414
299,501 $
16,965 $
(11,649)
5,280
10,596 $
22,407 $
1,040
(397)
23,050 $
18,120 $
65
1,099
19,284 $
363,107
(20,072)
9,396
352,431
135
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2016
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
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
$
$
$
$
268,794 $
(32,834)
(1)
56,156
292,115 $
65,026 $
(26,254)
14,259
(2,665)
50,366 $
21,578 $
(13,567)
1,251
(724)
8,538 $
6,290 $
(2,982)
(242)
616
3,682 $
361,688
(75,637)
15,267
53,383
354,701
374,772 $
(13,001)
(56,156)
305,615 $
18,545 $
(4,245)
2,665
16,965 $
22,039 $
(356)
724
22,407 $
18,834 $
(98)
(616)
18,120 $
434,190
(17,700)
(53,383)
363,107
136
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Eurobank Loans
The carrying amount of acquired Eurobank loans at December 31, 2018 and 2017 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
2018
2017
(In thousands)
156,722 $
2,959
153,763
41,699
112,064
24,971
87,093 $
179,960
5,845
174,115
49,672
124,443
25,174
99,269
$
$
The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the years ended
December 31, 2018, 2017 and 2016:
Year Ended December 31, 2018
Loans Secured
by 1-4 Family
Residential
Properties
Commercial
Construction &
Development
Secured by 1-4
Family Residential
Properties
(In thousands)
Leasing
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer from (to) non-accretable
discount
$
41,474 $
(5,964)
(1,129)
6,751 $
(6,430)
5,023
1,447 $
-
-
3,353
(2,034)
(792)
- $
- $
(52)
(329)
381
(389)
700
(311)
49,672
(12,835)
4,265
597
Balance at end of year
$
37,734 $
3,310 $
655 $
- $
- $
41,699
Non-Accretable Discount
Activity:
Balance at beginning of year
Change in actual and expected
losses
Transfer from (to) accretable
yield
$
4,576 $
276 $
758 $
- $
235 $
5,845
53
(2,310)
-
381
(413)
(2,289)
(3,353)
2,034
792
(381)
311
(597)
Balance at end of year
$
1,276 $
- $
1,550 $
- $
133 $
2,959
137
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2017
Loans
Secured by
1-4 Family
Residential
Properties Commercial
Construction &
Development
Secured by 1-4
Family Residential
Properties
(In thousands)
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
$
$
45,839 $
(7,180)
16,475 $
(12,985)
2,194
(82)
- $
(30)
- $
(283)
64,508
(20,560)
121
1,881
121
(217)
759
2,665
2,694
41,474 $
1,380
6,751 $
(786)
1,447 $
247
(476)
- $
- $
3,059
49,672
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
$
8,441 $
3,880 $
11 $
- $
8 $
12,340
(1,171)
(2,224)
(2,694)
4,576 $
(1,380)
276 $
$
(39)
786
758 $
247
(247)
- $
(249)
(3,436)
476
235 $
(3,059)
5,845
138
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2016
Loans
Secured by
1-4 Family
Residential
Properties Commercial
Construction &
Development
Secured by 1-4
Family Residential
Properties
(In thousands)
Leasing
Consumer
Total
Accretable Yield Activity:
Balance at beginning of period
Accretion
Change in expected cash flows
Transfer from (to) non-accretable
discount
$
51,954 $
(8,942)
2,134
26,970 $
(19,593)
13,722
2,255 $
(90)
1
693
(4,624)
28
- $
(60)
(15)
75
3,212 $
(1,813)
(1,386)
84,391
(30,498)
14,456
(13)
(3,841)
Balance at end of period
$
45,839 $
16,475 $
2,194 $
- $
- $
64,508
Non-Accretable Discount
Activity:
Balance at beginning of period
Change in actual and expected
cash flows
Transfer (to) from accretable
yield
$
12,869 $
- $
- $
- $
8,287 $
21,156
(3,735)
(693)
(744)
4,624
39
(28)
75
(75)
(8,292)
(12,657)
13
3,841
Balance at end of period
$
8,441 $
3,880 $
11 $
- $
8 $
12,340
139
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, 2018 and
2017:
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, 2016, 2017 and 2018
$
Non-traditional
Loss mitigation program
Commercial
Commercial secured by real estate
Institutional
Middle market
Retail
Other commercial and industrial
Middle market
Retail
Floor plan
Consumer
Credit cards
Overdrafts
Personal lines of credit
Personal loans
Cash collateral personal loans
Auto and leasing
Total non-accrual originated loans
$
December 31,
2018
2017
(In thousands)
2,538 $
5,818
3,600
5,140
6,697
8,427
1,462
33,682
3,085
22,107
58,874
9,911
7,266
16,123
33,300
6,481
2,629
46
9,156
42,456
411
-
31
2,909
3
3,354
13,494
118,178 $
3,070
6,380
3,280
5,905
7,984
6,259
1,649
34,527
3,543
16,783
54,853
118
11,394
14,438
25,950
6,323
2,929
51
9,303
35,253
1,227
31
102
900
312
2,572
4,232
96,910
140
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31,
2018
2017
(In thousands)
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
$
54 $
888
942
8
-
8
950
380
18
398
200
119
928
1,047
221
2
223
1,270
1,310
45
1,355
179
Total non-accrual acquired BBVAPR loans accounted
for under ASC 310-20
Total non-accrual loans
1,548
119,726 $
$
2,804
99,714
Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the
application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using
estimated cash flow analyses or are accounted under the cost recovery method.
Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing
loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 12 months or more past
due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. In
addition, these loans are excluded from the impairment analysis.
At December 31, 2018 and 2017, loans whose terms have been extended and which are classified as troubled-debt restructurings that
are not included in non-accrual loans amounted to $112.9 million and $109.2 million, respectively, as they are performing under their
new terms.
At December 31, 2018 and 2017, loans that are current in their monthly payments, but placed in non-accrual due to credit deterioration
amounted to $21.2 million and $20.1 million, respectively.
141
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired Loans
Oriental evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total
investment in impaired commercial loans that were individually evaluated for impairment was $82.0 million and $72.3 million at
December 31, 2018 and 2017, respectively. The impairments on these commercial loans were measured based on the fair value of
collateral or the present value of cash flows, including those identified as troubled-debt restructurings. The allowance for loan and
lease losses for these impaired commercial loans amounted to $8.4 million and $10.6 million at December 31, 2018 and 2017,
respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $84.2 million and
$85.4 million at December 31, 2018 and 2017, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings
was measured using the present value of cash flows. The allowance for loan losses for these impaired mortgage loans amounted to
$10.2 million and $9.1 million at December 31, 2018 and 2017, respectively.
Originated and Other Loans and Leases Held for Investment
Oriental’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for
investment that were individually evaluated for impairment and the related allowance for loan and lease losses at December 31, 2018
and 2017 are as follows:
December 31, 2018
Unpaid
Principal
Recorded
Investment
Related
Allowance Coverage
(In thousands)
Impaired loans with specific allowance:
Commercial
Residential impaired and troubled-debt restructuring
Impaired loans with no specific allowance:
Commercial
Total investment in impaired loans
$
$
$
54,636
95,659
$
49,092
84,174
8,434
10,186
38,241
188,536 $
32,137
165,403 $
N/A
18,620
17%
12%
0%
11%
December 31, 2017
Unpaid
Recorded
Related
Principal
Investment
Allowance Coverage
(In thousands)
Impaired loans with specific allowance:
Commercial
Residential impaired and troubled-debt restructuring
Impaired loans with no specific allowance
Commercial
$
57,922 $
94,971
52,585 $
10,573
85,403
9,121
22,022
18,953
N/A
Total investment in impaired loans
$
174,915 $
156,941 $
19,694
20%
11%
0%
13%
142
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Oriental’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually
evaluated for impairment and the related allowance for loan and lease losses at December 31, 2018 and 2017 are as follows:
Impaired loans with specific allowance
Commercial
Impaired loans with no specific allowance
Commercial
Total investment in impaired loans
Impaired loans with specific allowance
Commercial
Impaired loans with no specific allowance
Commercial
Total investment in impaired loans
December 31, 2018
Unpaid
Principal
Recorded
Investment
Related
Allowance
Coverage
(In thousands)
926 $
747 $
- $
926 $
-
747 $
14
N/A
14
2%
0%
2%
December 31, 2017
Unpaid
Principal
Recorded
Investment
Specific
Allowance
Coverage
(In thousands)
926 $
747 $
- $
926 $
-
747 $
20
N/A
20
3%
0%
3%
$
$
$
$
$
$
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Oriental’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and
their related allowance for loan and lease losses at December 31, 2018 and 2017 are as follows:
Impaired loan pools with specific allowance:
Mortgage
Commercial
Auto
Total investment in impaired loan pools
December 31, 2018
Unpaid
Principal
Recorded
Investment Allowance
(In thousands)
Coverage
to Recorded
Investment
$
$
498,537 $
188,413
14,551
701,501 $
492,890 $
180,790
14,403
688,083 $
15,225
20,641
6,144
42,010
3%
11%
43%
6%
143
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired loan pools with specific allowance:
Mortgage
Commercial
Consumer
Auto
Total investment in impaired loan pools
December 31 , 2017
Unpaid
Principal
Recorded
Investment Allowance
(In thousands)
Coverage
to Recorded
Investment
$
$
547,064 $
250,451
2,468
43,440
843,423 $
532,052 $
241,124
1,431
43,696
818,303 $
14,085
23,691
18
7,961
45,755
3%
10%
1%
18%
6%
The tables above only present information with respect to acquired BBVAPR loan pools accounted for under ASC 310-30 if there is a
recorded impairment to such loan pools and a specific allowance for loan losses.
Acquired Eurobank Loans
Oriental’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan
and lease losses as of December 31, 2018 and 2017 are as follows:
December 31, 2018
Unpaid
Principal
Recorded
Investment Allowance
(In thousands)
Coverage
to Recorded
Investment
Impaired loan pools with specific allowance:
Loans secured by 1-4 family residential properties $
Commercial
Consumer
Total investment in impaired loan pools
$
70,153 $
47,342
15
63,406 $
47,820
4
117,510 $
111,230 $
15,382
9,585
4
24,971
24%
20%
100%
22%
December 31, 2017
Unpaid
Principal
Recorded
Specific
Investment Allowance
(In thousands)
Coverage
to Recorded
Investment
Impaired loan pools with specific allowance
Loans secured by 1-4 family residential properties $
Commercial
Consumer
Total investment in impaired loan pools
$
81,132 $
58,099
15
69,538 $
53,793
4
139,246 $
123,335 $
15,187
9,983
4
25,174
22%
19%
100%
20%
The tables above only present information with respect to acquired Eurobank loan pools accounted for under ASC 310-30 if there is a
recorded impairment to such loan pools and a specific allowance for loan losses.
144
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for
impairment, which excludes loans accounted for under ASC 310-30, for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Year Ended December 31,
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
(In thousands)
$
1,624 $
2,556
44,727 $
84,494
1,538 $
3,301
25,797 $
87,414
452 $ 118,980
91,139
3,190
1,091
26,199
875
36,666
1,941
40,443
$
5,271 $
155,420 $
5,714 $
149,877 $
5,583 $ 250,562
$
- $
-
747 $
-
- $
-
794 $
-
- $
-
319
608
$
5,271 $
156,167 $
5,714 $
150,671 $
5,583 $ 251,489
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
Modifications
The following tables present the troubled-debt restructurings in all loan portfolios during the years ended December 31, 2018, 2017
and 2016.
145
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
Mortgage
Commerci
al
Consumer
Auto
143
$
23
174
2
19,029
26,019
2,313
40
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
Mortgage
Commerci
al
Consumer
Auto
85
$
24
107
9
10,441
13,828
1,391
134
Pre-
Modification
Weighted
Average
Rate
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
342 $
5.09%
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
18,237
25,973
2,332
40
4.41%
5.64%
9.86%
10.28%
314
136
61
32
5.75%
13.24%
10.42%
118
51
37
Year Ended December 31, 2017
Pre-
Modification
Weighted
Average
Rate
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
$
390
6.23%
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
6.05%
11.68%
7.24%
57
62
66
10,343
13,829
1,430
135
4.40%
5.73%
10.85%
11.75%
384
62
69
37
Mortgage
Commerci
al
Consumer
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
90
$
11,684
Pre-
Modification
Weighted
Average
Rate
Year Ended December 31, 2016
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
351 $
6.05%
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
11,625
10,151
902
4.77%
5.93%
11.23%
439
116
66
20
75
9,833
817
5.73%
13.60%
64
73
146
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents troubled-debt restructurings for which there was a payment default during the years ended December 31,
2018, 2017 and 2016:
Year Ended December 31,
2018
2017
2016
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(Dollars in thousands)
23
$
4
$
28
$
3,262
2,141
341
34
$
3,129
19
$
2,241
5
$
20
$
452
249
2
$
11
$
157
126
Mortgage
Commercial
Consumer
147
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit Quality Indicators
Oriental categorizes originated and other loans and acquired loans accounted for under ASC 310-20 into risk categories based on
relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics,
prior loss experience, and the results of periodic credit reviews of individual loans.
Oriental uses the following definitions for risk ratings:
Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent
risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.
Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution’s credit position at some future date.
Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, questionable and improbable.
Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is
not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not
practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
rated loans.
148
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2018 and 2017, and based on the most recent analysis performed, the risk category of gross originated and other
loans and BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:
December 31, 2018
Risk Ratings
Balance
Special
Outstanding
Pass
Mention
Substandard
Doubtful
Loss
(In thousands)
Commercial - originated and
other loans held for
investment
Commercial secured by real
estate:
Corporate
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
Total
289,052 $
69,613
207,463
224,114
4,184
19,009
246,711 $
59,509
151,638
198,402
2,890
19,009
26,544 $
-
32,638
3,996
-
-
813,435
678,159
63,178
179,885
156,410
87,967
310,212
49,679
784,153
1,597,588
154,629
156,410
63,876
307,160
47,092
729,167
1,407,326
25,256
-
13,737
318
2,541
41,852
105,030
15,797 $
10,104
23,187
21,716
1,294
-
72,098
-
-
10,354
2,734
46
13,134
85,232
54
982
1,036
1,510
1,510
2,546
-
94
94
1,510
1,510
1,604
-
-
-
-
-
-
54
888
942
-
-
942
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
149
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Risk Ratings
Balance
Special
Outstanding
Pass
Mention
Substandard
Doubtful
Loss
(In thousands)
Retail - originated and other
loans held for investment
Mortgage:
Traditional
Non-traditional
Loss mitigation program
Home equity secured personal
loans
GNMA's buy-back option
program
527,732
14,273
106,833
493,952
11,188
87,444
250
250
19,721
668,809
-
592,834
Consumer:
Credit cards
Overdrafts
Unsecured personal lines of
credit
Unsecured personal loans
Cash collateral personal loans
Auto and Leasing
Total
28,034
214
27,623
204
1,917
303,119
15,696
348,980
1,129,695
2,147,484
1,895
301,857
15,693
347,272
1,116,201
2,056,307
Retail - acquired loans
(accounted for under ASC 310-
20)
Consumer:
Credit cards
Personal loans
Auto
21,822
2,166
23,988
4,435
28,423
3,776,041 $
21,442
2,148
23,590
4,235
27,825
3,493,062 $
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
105,030 $
33,780
3,085
19,389
-
19,721
75,975
411
10
22
1,262
3
1,708
13,494
91,177
-
-
-
-
-
-
-
-
-
-
-
-
-
-
380
18
398
200
598
177,949 $
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
150
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2017
Risk Ratings
Balance
Outstanding
Special
Mention
Pass
Substandard
Doubtful
Loss
(In thousands)
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
235,426 $
44,766
229,941
246,067
3,998
17,556
200,395 $
33,856
196,058
215,121
2,678
17,556
33,094 $
-
4,749
8,058
1,320
-
1,937 $
10,910
29,134
22,888
-
-
777,754
665,664
47,221
64,869
170,015
125,591
85,363
113,252
35,286
529,507
1,307,261
157,683
125,591
71,222
109,477
32,165
496,138
1,161,802
12,332
-
6,386
562
3,070
22,350
69,571
119
1,321
1,440
2,938
2
2,940
4,380
-
393
393
2,933
-
2,933
3,326
-
-
-
-
-
-
-
-
-
7,755
3,213
51
11,019
75,888
119
928
1,047
5
2
7
1,054
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
151
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2017
Risk Ratings
Balance
Outstanding
Special
Mention
Pass
Substandard
Doubtful
Loss
(In thousands)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
69,571 $
36,763
3,543
18,923
-
8,268
67,497
1,227
56
87
222
312
1,904
4,232
73,633
1,311
46
1,357
179
1,536
152,111 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Retail - originated and other
loans held for investment
Mortgage:
Traditional
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
Total
Retail - acquired loans
(under ASC 310-20)
Consumer:
Credit cards
Personal loans
Auto
Total
553,533
18,270
103,280
516,770
14,727
84,357
256
256
8,268
683,607
-
616,110
28,430
214
27,203
158
2,220
284,477
14,698
330,039
883,985
1,897,631
2,133
284,255
14,386
328,135
879,753
1,823,998
26,467
2,448
28,915
21,969
50,884
3,260,156 $
25,156
2,402
27,558
21,790
49,348
3,038,474 $
$
152
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of Oriental’s allowance for loan and lease losses at December 31, 2018 and 2017 was as follows:
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage
Commercial
Consumer
Auto and leasing
Total allowance for originated and other loans and lease losses
$
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
Consumer
Auto
Total allowance for acquired BBVAPR loans and lease losses
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties
Commercial
Consumer
Total allowance for acquired Eurobank loan and lease losses
December 31,
2018
2017
(In thousands)
19,783 $
30,326
15,571
29,508
95,188
20,439
30,258
16,454
25,567
92,718
22
1,905
135
2,062
15,225
20,641
-
6,144
42,010
44,072
15,382
9,585
4
24,971
42
3,225
595
3,862
14,085
23,691
18
7,961
45,755
49,617
15,187
9,983
4
25,174
Total allowance for loan and lease losses
$
164,231 $
167,509
Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses
based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses policy provides for a detailed
quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral,
current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available
information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond Oriental’s
control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is
deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the
loans exceed the remaining credit discount recorded at the time of acquisition.
153
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. Management
performed an evaluation of the loan portfolios to assess the impact on repayment sources and underlying collateral that could result in
additional losses.
For the commercial portfolio, the framework for the analysis was based on our current ALLL methodology with additional
considerations according to the estimated impact categorized as low, medium or high. From this impact assessment, additional reserve
levels were estimated by increasing default probabilities (“PD”) and loss given default expectations (“LGD”) of each allowance
segment.
As part of the process, Oriental contacted its clients to evaluate the impact of the hurricanes on their business operations and collateral.
The impact was then categorized as follows: (i) low risk, for clients that had no business impact or relatively insignificant impact; (ii)
medium risk, for clients that had a business impact on their primary or secondary sources of repayment, but still had adequate cash
flow to cover operations and to satisfy their obligations; or (iii) high risk, for clients that had potentially significant problems that
affected primary, secondary and tertiary (collateral) sources of repayment. This criterion was used to model adjusted PDs and LGDs
considering internal and external sources of information available to support our estimation process and output.
During the fourth quarter of 2017, Oriental performed an update of the initial estimate, taking into consideration the most recent
available information gathered through additional visits and interviews with clients and the economic environment in Puerto Rico.
For the retail portfolios, mortgage, consumer and auto, the assumptions established in the initial estimate were based on the historical
losses of each ALLL segment and then further adjusted based on parameters used as key risk indicators, such as the industry of
employment for all portfolios and the location of the collateral for mortgage loans. During the fourth quarter of 2017, Oriental
performed additional procedures to evaluate the reasonability of the initial estimate based on the payment experience percentage of
borrowers for which the deferral period expired. The analysis took into consideration historical payment behavior and loss experience
of borrowers (PDs and LGDs) of each portfolio segment to develop a range of estimated potential losses. Management understands
that this approach is reasonable given the lack of historical information related to the behavior of local borrowers in such an
unprecedented event. The amount used in the analysis represents the average of potential outcomes of expected losses.
During 2018, Oriental continued its monitoring process of the performance of those affected borrowers. As information became
available, it was incorporated into the allowance framework.
At December 31, 2018 and 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio,
including the impact of hurricanes Irma and Maria.
154
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for Originated and Other Loan and Lease Losses Held for Investment
The following tables present the activity in our allowance for loan and lease losses and the related recorded investment of the
originated and other loans held for investment portfolio by segment for the periods indicated:
Allowance for loan and lease losses for
originated and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for loan and lease losses
Balance at end of year
Year Ended December 31, 2018
Mortgage
Commercial Consumer
(In thousands)
Auto and
Leasing
Total
$
$
20,439 $
(5,297)
1,047
3,594
19,783 $
30,258 $
(6,782)
654
6,196
30,326 $
16,454 $
(17,629)
1,757
14,989
15,571 $
25,567 $
(42,685)
19,344
27,282
29,508 $
92,718
(72,393)
22,802
52,061
95,188
Year Ended December 31, 2017
Mortgage Commercial Consumer
Auto and
Leasing
Unallocated
Total
(In thousands)
Allowance for loan and lease losses for
originated and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for originated
and other loan and lease losses
Balance at end of year
$
$
17,344 $
(6,623)
585
8,995 $
(7,684)
1,281
13,067 $
(13,641)
1,209
19,463 $
(33,908)
12,314
431 $
-
-
59,300
(61,856)
15,389
9,133
20,439 $
27,666
30,258 $
15,819
16,454 $
27,698
25,567 $
(431)
- $
79,885
92,718
Year Ended December 31, 2016
Mortgage Commercial Consumer
Auto and
Leasing
Unallocated
Total
(In thousands)
Allowance for loan and lease losses for
originated and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for originated and other
loan and lease losses
Balance at end of year
$
$
18,352 $
(6,767)
330
64,791 $
(62,445)
460
11,197 $
(11,554)
452
18,261 $
(31,731)
12,871
25 $
-
-
112,626
(112,497)
14,113
5,429
17,344 $
6,189
8,995 $
12,972
13,067 $
20,062
19,463 $
406
431 $
45,058
59,300
155
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Mortgage
Commercial
Consumer
Auto and
Leasing
Total
December 31, 2018
(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
$
$
$
$
10,186 $
9,597
19,783
$
8,434 $
21,892
30,326
$
- $
- $
15,571
15,571
$
29,508
29,508
$
18,620
76,568
95,188
84,174 $
584,635
668,809 $
81,229 $
1,516,359
1,597,588 $
- $
165,403
348,980
3,579,669
1,129,695
348,980 $ 1,129,695 $ 3,745,072
- $
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
December 31, 2017
(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 BBVAPR Acquired Loan Losses
9,121 $
11,318
20,439 $
10,573 $
19,685
30,258 $
- $
- $
16,454
16,454
$
25,567
25,567
$
85,403 $
71,538 $
- $
- $
598,204 1,235,723
683,607 $ 1,307,261 $
330,039
330,039 $
883,985
883,985 $
- $
-
- $
19,694
73,024
92,718
- $
156,941
- 3,047,951
- $ 3,204,892
Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in
our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated:
156
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
Commercial
Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
$
$
$
42
(6)
23
$
3,225
(2,459)
480
$
595
(372)
831
3,862
(2,837)
1,334
(37)
659
(919)
22
$
1,905
$
135
$
(297)
2,062
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
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
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
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
Year Ended December 31, 2017
Commercial
Consumer
Auto
Total
(In thousands)
169 $
(132)
5
3,028 $
(3,048)
446
1,103 $
(976)
1,420
4,300
(4,156)
1,871
-
42 $
2,799
3,225 $
(952)
595 $
1,847
3,862
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
169 $
2,917
3,028 $
(774)
1,103 $
2,255
4,300
$
$
$
$
157
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Commercial
Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Ending allowance balance attributable
to loans:
Individually evaluated for impairment
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:
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
$
$
$
$
$
$
$
$
14 $
8
22 $
- $
1,905
1,905 $
747 $
1,799
2,546 $
- $
23,988
23,988 $
- $
135
135 $
- $
4,435
4,435 $
14
2,048
2,062
747
30,222
30,969
December 31, 2017
Commercial
Consumer
Auto
Total
(In thousands)
20 $
22
42 $
747 $
3,633
4,380 $
- $
3,225
3,225 $
- $
28,915
28,915 $
- $
595
595 $
- $
21,969
21,969 $
20
3,842
3,862
747
54,517
55,264
Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For loans accounted for under ASC 310-30, as part of the evaluation of actual versus expected cash flows, Oriental assesses on a
quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions.
Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through
the end of the reporting period.
The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR
loan portfolio accounted for under ASC 310-30 for the periods indicated:
158
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
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 (recapture) for acquired BBVAPR
loans and lease losses accounted for under
ASC 310-30
Allowance de-recognition
Balance at end of year
$
14,085
$
23,691
$
18 $
7,961
45,755
1,331
(191)
15,225
$
$
1,360
(4,410)
20,641
$
(18)
-
- $
(887)
(930)
6,144
1,786
(5,531)
42,010
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for
under
ASC 310-30:
Balance at beginning of year
Provision for acquired BBVAPR loans and
lease losses accounted for under ASC 310-30
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 for acquired BBVAPR loans and
ease losses accounted for under ASC 310-30
Loan pools fully charged-off
Allowance de-recognition
Balance at end of year
Year Ended December 31, 2017
Mortgage
Commercial
Consumer
(In thousands)
Auto
Total
$
2,682
$
23,452
$
-
$
4,922
$
31,056
11,497
(94)
14,085
$
$
9,758
(9,519)
23,691
$
18
-
18
$
3,408
(369)
7,961
$
24,681
(9,982)
45,755
Mortgage
Commercial
Year Ended December 31, 2016
Consumer
(In thousands)
Auto
Total
$
1,762
$
21,161
$
-
$
2,862
$
25,785
1,105
(14)
(171)
2,682
$
11,710
(66)
(9,353)
23,452
$
$
-
-
-
-
$
2,693
(202)
(431)
4,922
$
15,508
(282)
(9,955)
31,056
159
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for Acquired Eurobank Loan Losses
The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2018, 2017 and
2016 were as follows:
Year Ended December 31, 2018
Loans
Secured by
1-4 Family
Residential
Properties Commercial Consumer
(In thousands)
Total
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year
Provision for loan and lease losses, net
Allowance de-recognition
Balance at end of year
$
$
15,187
1,806
(1,611)
15,382
$
$
$
9,983
761
(1,159)
9,585
$
4
-
-
4
$
$
25,174
2,567
(2,770)
24,971
Year Ended December 31, 2017
Loans
secured by 1-
4 Family
Residential
Properties Commercial Consumer
(In thousands)
Total
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year
Provision for acquired Eurobank loan and lease losses, net
Allowance de-recognition
Balance at end of year
$
$
11,947
5,045
(1,805)
15,187
$
$
$
9,328
1,680
(1,025)
9,983
$
6
-
(2)
4
$
$
21,281
6,725
(2,832)
25,174
Year Ended December 31, 2016
Loans
secured by 1-
4 Family
Residential
Properties Commercial Consumer
(In thousands)
Total
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of year
Provision (recapture) for acquired Eurobank loan and lease
losses, net
FDIC shared-loss portion of provision for covered loan and lease
losses, net
Loan pools fully charged-off
Allowance de-recognition
Balance at end of year
$
$
22,570
$
67,365
$
243
$
90,178
1,080
1,183
(8)
2,255
3,391
-
(15,094)
11,947
$
-
(134)
(59,086)
9,328
$
-
-
(229)
6
$
3,391
(134)
(74,409)
21,281
160
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8- FDIC SHARED-LOSS AGREEMENTS
On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a
payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the
anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the
end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the years ended
December 31, 2018, 2017, and 2016:
2018
Year Ended December 31,
2017
(In thousands)
2016
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 benefit (expense)
Net expenses incurred under shared-loss agreements
Shared-loss termination settlement
Balance at end of year
$
True-up payment obligation:
Balance at beginning of year
Change in true-up payment obligation
Shared-loss termination settlement
Balance at end of year
$
$
- $
-
-
-
-
-
- $
- $
-
-
- $
14,411
-
$
-
1,403
-
(15,814)
-
26,786
-
(26,786)
-
$
$
$
22,599
(1,573)
3,391
(8,040)
(1,966)
-
14,411
24,658
2,128
-
26,786
Oriental recognized an FDIC shared-loss (benefit) expense, net in the consolidated statements of operations, which consists of the
following, for the years ended December 31, 2018, 2017 and 2016:
2018
Year Ended December 31,
2017
(In thousands)
2016
FDIC indemnification asset (benefit) expense
Change in true-up payment obligation
Reimbursement to FDIC for recoveries
$
- $
-
-
(1,403) $
-
-
8,040
2,128
3,413
Total FDIC shared-loss (benefit) expense, net
$
- $
(1,403) $
13,581
161
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 9 — FORECLOSED REAL ESTATE
The following tables present the activity related to foreclosed real estate for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, 2018
Originated and
other loans and
leases held for
investment
Acquired
BBVAPR loans
Acquired
Eurobank
loans
(In thousands)
Total
Balance at beginning of year
Decline in value
Additions
Sales
Balance at end of year
$
$
14,283 $
(1,535)
6,674
(9,851)
9,571 $
18,347
(2,899)
9,832
(10,663)
14,617
$
$
11,544
(1,323)
3,505
(4,146)
9,580
$
$
44,174
(5,757)
20,011
(24,660)
33,768
Year Ended December 31, 2017
Originated and
other loans and
leases held for
investment
Acquired
BBVAPR loans
Acquired
Eurobank
loans
(In thousands)
Total
Balance at beginning of year
Decline in value
Additions
Sales
Other adjustments
Balance at end of year
$
$
12,390 $
(1,913)
10,565
(6,615)
(144)
14,283 $
21,379
(2,850)
9,416
(9,453)
(145)
18,347
$
$
13,751
(1,797)
3,120
(3,530)
-
11,544
$
$
47,520
(6,560)
23,101
(19,598)
(289)
44,174
Year Ended December 31, 2016
Originated and
other loans and
leases held for
investment
Acquired
BBVAPR loans
Acquired
Eurobank
loans
(In thousands)
Total
Balance at beginning of year
Decline in value
Additions
Sales
Balance at end of year
$
$
10,324 $
(1,966)
10,170
(6,138)
12,390 $
26,757
(6,124)
7,872
(7,126)
21,379
$
$
21,095
(4,913)
3,591
(6,022)
13,751
$
$
58,176
(13,003)
21,633
(19,286)
47,520
162
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 10 — PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2018 and 2017 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,
2018
2017
(In thousands)
$
$
5,028 $
67,856
18,274
17,137
24,855
133,150
(64,258)
68,892 $
5,638
64,277
20,647
16,242
28,783
135,587
(67,727)
67,860
Depreciation and amortization of premises and equipment totaled $8.9 million in 2018, $9.0 million in 2017 and $9.4 million in 2016.
These are included in the consolidated statements of operations as part of occupancy and equipment expenses.
NOTE 11 - SERVICING ASSETS
Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an
obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is
recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans
and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to
adequately compensate Oriental for its expected cost.
All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value
measurement method, Oriental measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing
assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the
consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated
and actual prepayment speeds and default rates and losses.
The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs,
and other economic factors, which are determined based on current market conditions.
At December 31, 2018, the servicing asset amounted to $10.7 million ($9.8 million — December 31, 2017) related to mortgage
servicing rights.
163
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, 2018,
2017, and 2016:
Year Ended December 31,
2018
2017
2016
Fair value at beginning of year
Servicing from mortgage securitizations or asset transfers
Changes due to payments on loans
Changes in fair value due to changes in valuation model inputs or
assumptions
(In thousands)
$ 9,821
1,481
(814)
$ 9,858
1,658
(590)
$ 7,455
2,616
(489)
228
(1,105)
276
Fair value at end of year
$ 10,716
$ 9,821
$ 9,858
The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for
the years ended 2018, 2017 and 2016:
Constant prepayment rate
Discount rate
Year Ended December 31,
2018
2017
4.30% - 9.02%
10.00% - 12.00%
3.94% - 8.49%
10.00% - 12.00%
2016
4.24% - 9.14%
10.00% - 12.00%
The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key
assumptions were as follows:
December 31, 2018
(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
$
$
$
$
$
10,716
(207)
(406)
(489)
(939)
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 2018, 2017 and 2016 totaled $4.1 million, $3.9 million and $3.7 million,
respectively.
164
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 12 — DERIVATIVES
The following table presents Oriental’s derivative assets and liabilities at December 31, 2018 and 2017:
Derivative assets:
Interest rate swaps designated as cash flow hedges
Interest rate swaps not designated as hedges
Interest rate caps
Derivative liabilities:
Interest rate swaps designated as cash flow hedges
Interest rate swaps not designated as hedges
Interest rate caps
Interest Rate Swaps
December 31,
2018
2017
(In thousands)
$
$
$
$
14 $
126
207
347 $
- $
126
207
333 $
-
618
153
771
510
618
153
1,281
Oriental enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale
borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix Oriental’s interest
payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated
rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions and are properly
documented as such; therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the
cash flow hedges is recognized in other comprehensive (loss) and is subsequently reclassified into operations in the period during
which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated
other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently,
Oriental does not expect to reclassify any amount included in other comprehensive (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, 2018:
Type
Interest Rate Swaps
Notional
Amount
(In thousands)
33,964
33,964
$
$
Fixed
Rate
Variable
Rate Index
Trade
Date
Settlement
Date
Maturity
Date
2.4210%
1-Month LIBOR
07/03/13
07/03/13
08/01/23
An accumulated unrealized gain of $14 thousand and a loss of $510 thousand were recognized in accumulated other comprehensive
income related to the valuation of these swaps at December 31, 2018 and 2017, respectively, and the related asset or liability is being
reflected in the consolidated statements of financial condition.
At December 31, 2018 and 2017, interest rate swaps not designated as hedging instruments that were offered to clients represented an
asset of $126 thousand and $618 thousand, respectively, and were included as part of derivative assets in the consolidated statements
of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At December 31, 2018
and 2017, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients
represented a liability of $126 thousand and $618 thousand, respectively, and were included as part of derivative liabilities in the
consolidated statements of financial condition.
165
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, 2018:
Notional
Amount
(In thousands)
Fixed
Rate
Variable
Rate Index
Settlement
Date
Maturity
Date
$
$
$
$
12,500
12,500
12,500
12,500
5.5050%
1-Month LIBOR
04/11/09
04/11/19
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
Oriental has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial
results against increases in interest rates. In these cases, Oriental simultaneously enters into mirror-image interest rate cap transactions
with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market
through earnings. As of December 31, 2018 and 2017, the outstanding total notional amount of interest rate caps was $150.9 million
and $152.6 million, respectively. At December 31, 2018 and 2017, the interest rate caps sold to clients represented a liability of $207
thousand and $153 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial
condition. At December 31, 2018 and 2017, the interest rate caps purchased as mirror-images represented an asset of $207 thousand
and $153 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.
NOTE 13 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at December 31, 2018 and 2017 consists of the following:
Loans, excluding acquired loans
Investments
December 31,
2018
2017
(In thousands)
30,409 $
3,845
34,254 $
46,936
3,033
49,969
$
$
166
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accrued interest receivable at December 31, 2017, included $39.7 million, resulting from the loan payment moratorium. Accrued
interest receivable resulting from the loan payment moratorium has been decreasing, as most moratoriums have expired. Some of
these accrued interests are payable at the end of the loan term.
Other assets at December 31, 2018 and 2017 consist of the following:
Prepaid expenses
Other repossessed assets
Core deposit and customer relationship intangibles
Tax credits
Investment in Statutory Trust
Accounts receivable and other assets
December 31,
2018
2017
(In thousands)
9,788 $
2,986
3,369
2,277
1,083
37,842
57,345 $
9,200
3,548
4,687
4,277
1,083
41,898
64,693
$
$
Prepaid expenses amounting to $9.8 million and $9.2 million at December 31, 2018 and 2017, respectively, include prepaid municipal,
property and income taxes aggregating to $5.5million and $5.7 million, respectively.
In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, Oriental recorded a core deposit intangible
representing the value of checking and savings deposits acquired. At December 31, 2018 and 2017 this core deposit intangible
amounted to $2.5 million and $3.3 million, respectively. In addition, Oriental recorded a customer relationship intangible representing
the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR
Acquisition. At December 31, 2018 and 2017, this customer relationship intangible amounted to $888 thousand and $1.4 million,
respectively.
Other repossessed assets totaled $3.0 million and $3.5 million at December 31, 2018 and 2017, respectively, that consist mainly of
repossessed automobiles, which are recorded at their net realizable value.
At December 31, 2018 and 2017, tax credits for Oriental totaled $2.3 million and $4.3 million, respectively. These tax credits do not
have an expiration date.
NOTE 14— DEPOSITS AND RELATED INTEREST
Total deposits, including related accrued interest payable, as of December 31, 2018 and 2017 consist of the following:
Non-interest bearing demand deposits
Interest-bearing savings and demand deposits
Retail certificates of deposit
Institutional certificates of deposit
Total core deposits
Brokered deposits
Total deposits
167
December 31,
2018
2017
(In thousands)
1,105,324
2,274,423
805,712
197,559
4,383,018
525,097
4,908,115
$
$
969,525
2,274,116
827,359
209,951
4,280,951
518,531
4,799,482
$
$
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Brokered deposits include $500.8 million in certificates of deposits and $24.3 million in money market accounts at December 31,
2018, and $471.6 million in certificates of deposits and $46.9 million in money market accounts at December 31, 2017.
The weighted average interest rate of Oriental’s deposits was 0.67% and 0.65%, respectively, at December 31, 2018 and 2017.
Interest expense for the years ended December 31, 2018, 2017, and 2016 was as follows:
2018
Year Ended December 31,
2017
(In thousands)
2016
Demand and savings deposits
Certificates of deposit
$
$
12,478 $
20,475
32,953 $
11,426 $
18,872
30,298 $
12,004
17,249
29,253
At December 31, 2018 and 2017, time deposits in denominations of $250 thousand or higher, excluding accrued interest and
unamortized discounts, amounted to $346.0 million and $359.6 million, respectively. Such amounts include public funds time deposits
from various Puerto Rico government municipalities, agencies and corporations of $19.6 million and $3.5 million at a weighted
average rate of 116.4% and 0.28% at December 31, 2018 and 2017, respectively.
At December 31, 2018 and 2017, total public fund deposits from various Puerto Rico government municipalities, agencies and
corporations amounted to $207.4 million and $153.1 million, respectively. These public funds were collateralized with commercial
loans amounting to $281.2 million and $173.0 million at December 31, 2018 and 2017, respectively.
Excluding accrued interest of approximately $3.1 million, the scheduled maturities of certificates of deposit at December 31, 2018 and
2017 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,
2018
2017
(In thousands)
$
$
305,088 $
545,363
850,451
484,197
89,340
34,018
42,998
1,501,004 $
316,382
508,285
824,667
470,670
137,016
36,125
38,623
1,507,101
The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $1.1 million and $2.2
million as of December 31, 2018 and 2017, respectively.
168
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 15— BORROWINGS AND RELATED INTEREST
Securities Sold under Agreements to Repurchase
At December 31, 2018, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties
with whom the repurchase agreements were transacted. The counterparties have agreed to resell to Oriental the same or similar
securities at the maturity of these agreements. The purpose of these transactions is to provide financing for Oriental’s securities
portfolio.
The following table shows Oriental’s repurchase agreements, excluding accrued interest in the amount of $785 thousand and $369
thousand, respectively, at December 31, 2018 and 2017:
December 31,
2018
2017
(In thousands)
Short-term fixed-rate repurchase agreements, interest ranging
from 2.45% to 2.95%
Long-term fixed-rate repurchase agreements, interest ranging
from 1.42% to 2.86% (December 31, 2017: 1.42% to 1.85%)
Total assets sold under agreements to repurchase
$
$
214,723 $
-
240,000
454,723 $
192,500
192,500
169
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Repurchase agreements mature as follows:
December 31,
2018
2017
(In thousands)
Less than 90 days
Over 90-days
Total
$
$
214,723 $
240,000
454,723 $
-
192,500
192,500
The following securities were sold under agreements to repurchase:
Underlying Securities
FNMA and FHLMC Certificates
Total
Underlying Securities
FNMA and FHLMC Certificates
Total
December 31, 2018
Amortized
Cost of
Underlying
Securities
Approximate
Fair Value
of Underlying
Securities
Weighted
Average
Interest Rate
of Security
Balance of
Borrowing
496,814 $
496,814 $
(Dollars in thousands)
454,723 $
454,723 $
487,181
487,181
3.01%
3.01%
December 31, 2017
Amortized
Cost of
Underlying
Securities
Approximate
Fair Value
of Underlying
Securities
Weighted
Average
Interest Rate
of Security
Balance of
Borrowing
207,506 $
207,506 $
(Dollars in thousands)
192,500 $
192,500 $
205,483
205,483
3.03%
3.03%
$
$
$
$
The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2018, 2017 and
2016, excluding accrued interest:
2018
December 31,
2017
(In thousands)
2016
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
$
$
357,086 $
457,053 $
2.17%
2.49%
393,133 $
606,210 $
1.80%
1.63%
663,845
902,500
2.83%
2.47%
Advances from the Federal Home Loan Bank of New York
Advances are received from the FHLB-NY under an agreement whereby Oriental is required to maintain a minimum amount of
qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2018 and 2017, these advances
were secured by mortgage and commercial loans amounting to $847.3 million and $1.3 billion, respectively. Also, at December 31,
2018 and 2017, Oriental had an additional borrowing capacity with the FHLB-NY of $762.0 million and $920.0 million, respectively.
At December 31, 2018 and 2017, the weighted average remaining maturity of FHLB’s advances was 26.6 months and 3.2 months,
respectively. The original terms of these advances range between one day and seven years, and the FHLB-NY does not have the right
to exercise put options at par on any advances outstanding as of December 31, 2018.
170
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $176 thousand and
$322 thousand, at December 31, 2018 and 2017, respectively:
December 31
2018
2017
(In thousands)
33,572
35,113
$
43,872
77,444
64,208
99,321
Short-term fixed-rate advances from FHLB, with a weighted average
interest rate of 2.61% (December 31, 2017 - 1.49%)
Long-term fixed-rate advances from FHLB, with a weighted average
interest rate of 2.89% (December 31, 2017 - 2.24%)
Advances from FHLB mature as follows:
Under 90 days
Over one to three years
Over three to five years
December 31,
2018
(In thousands)
33,572
8,867
35,005
77,444
$
All of the advances referred to above with maturity dates up to the date of this report were renewed as one-month short-term advances.
Subordinated Capital Notes
Subordinated capital notes amounted to $36.1 million at December 31, 2018 and 2017, respectively.
In August 2003, the Statutory Trust II, a special purpose entity of the Company, was formed for the purpose of issuing trust
redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the
Statutory Trust II as part of a pooled underwriting transaction.
The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated
deferrable interest debenture issued by Oriental. The subordinated deferrable interest debenture has a par value of $36.1 million, bears
interest based on 3-month LIBOR plus 295 basis points (5.74% at December 31, 2018; 4.55.% at December 31, 2017), 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
2019). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest
debenture. The subordinated deferrable interest debenture issued by Oriental is accounted for as a liability denominated as a
subordinated capital note on the consolidated statements of financial condition.
The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the Basel III capital
rules issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their
Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such
instruments issued before May 19, 2010 by a bank holding company, such as Oriental, with total consolidated assets of less than $15
billion as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, Oriental is permitted to continue to include
its existing trust preferred securities as Tier 1 capital.
171
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 16 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
Oriental’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition,
Oriental’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off
with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party
has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in
respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting
agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party
custodian pursuant to an account control agreement.
The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities
at December 31, 2018 and 2017:
December 31, 2018
Gross Amounts Not Offset
in the Statement of
Financial Condition
Gross Amounts
Offset in the
Net Amount
of
Assets
Presented
Gross
Amount
of Recognized
Assets
Statement of
in Statement
Cash
Financial
Condition
of Financial Financial Collateral
Instruments Received
Condition
Net
Amount
(In thousands)
Derivatives
$
347 $
- $
347 $
2,037 $
- $
(1,690)
December 31, 2017
Gross Amounts Net amount of
Offset in the
Assets
Presented
Gross Amounts Not Offset
in the Statement of
Financial Condition
Gross
Amount
of Recognized
Assets
Statement of
in Statement
Cash
Financial
Condition
of Financial Financial Collateral
Instruments Received
Condition
Net
Amount
(In thousands)
Derivatives
$
771 $
- $
771 $
2,010 $
- $
(1,239)
172
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Gross Amounts
Offset in the
Net Amount
of
Liabilities
Presented
Gross Amounts Not Offset
in the Statement of
Financial Condition
Gross
Amount
of Recognized
Liabilities
Statement of
in Statement
Cash
Financial
Condition
of Financial Financial Collateral
Instruments Provided
Condition
Net
Amount
$
333
$
- $
(In thousands)
$
333
-
$
1,980
$
(1,647)
454,723
-
454,723
487,181
-
(32,458)
Derivatives
Securities sold under agreements to
repurchase
Total
$
455,056
$
- $
455,056
$ 487,181
$
1,980
$
(34,105)
December 31, 2017
Gross Amounts
Offset in the
Net Amount
of
Liabilities
Presented
Gross Amounts Not Offset
in the Statement of
Financial Condition
Gross
Amount
of Recognized
Liabilities
Statement of
in Statement
Cash
Financial
Condition
of Financial Financial Collateral
Instruments Provided
Condition
Net
Amount
$
1,281
$
- $
(In thousands)
$
1,281
-
$
1,980
$
(699)
192,500
-
192,500
205,483
-
(12,983)
Derivatives
Securities sold under agreements to
repurchase
Total
$
193,781
$
- $
193,781
$ 205,483
$
1,980
$
(13,682)
173
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 17 — EMPLOYEE BENEFIT PLAN
Oriental has a profit sharing plan containing a cash or deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d) of the
Puerto Rico Internal Revenue Code of 2011, as amended, (the "PR Code"), and Sections 401(a) and 401(k) of the United States
Internal Revenue Code of 1986, as amended. This plan is subject to the provisions of Title I of the Employee Retirement Income
Security Act of 1976, as amended (“ERISA”). This plan covers all full-time employees of Oriental who are age 21 or older. Under this
plan, participants may contribute each year up to $18,500. Oriental's matching contribution is 50 cents for each dollar contributed by
an employee, up to 4% of such employee’s base salary. It is invested in accordance with the employee’s decision among the available
investment alternatives provided by the plan. This plan is entitled to acquire and hold qualified employer securities as part of its
investment of the trust assets pursuant to ERISA Section 407. Oriental contributed $853 thousand, $835 thousand and $792 thousand
in cash during 2018, 2017 and 2016, respectively. Oriental’s contribution becomes 100% vested once the employee completes three
years of service.
Also, Oriental offers to its senior management a non-qualified deferred compensation plan, where executives can defer taxable
income. Both the employer and the employee have flexibility because non-qualified plans are not subject to ERISA contribution limits
nor are they subject to discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current
taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without
current income tax to the individual. Income taxes are due when the funds are withdrawn.
NOTE 18 — RELATED PARTY TRANSACTIONS
Oriental grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of
business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the
years December 31, 2018, 2017, and 2016 was as follows:
Balance at the beginning of year
New loans and disbursements
Repayments
Balance at the end of year
$
$
Year Ended December 31,
2017
2018
2016
(In thousands)
28,138 $
10,388
(10,006)
28,520 $
29,020 $
2,875
(3,757)
28,138 $
31,475
2,329
(4,784)
29,020
Oriental also hires professional services amounting to $1.5 million from a related party.
174
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 19 — INCOME TAXES
Oriental is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code, as amended (the “Puerto Rico Code”). For
2018, the Puerto Rico Code imposed a maximum statutory corporate tax rate of 39%. Oriental has operations in U.S. through its
wholly owned subsidiary OPC, a retirement plan administration based in Florida. Also, in October 2017, Oriental expanded its
operations in U.S. through the Bank's wholly owned subsidiary OFG USA. Both subsidiaries are subject to state and federal taxes.
OPC is subject to Florida state taxes and OFG USA is subject to North Carolina state taxes. OFG USA elected to be classified as a
corporation.
Under the Puerto Rico Code, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns.
OFG Bancorp and its subsidiaries are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income
earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any
one year may be used to offset regular income tax in future years, subject to certain limitations.
The components of income tax expense for the years ended December 31, 2018, 2017, and 2016 are as follows:
Year Ended December 31,
2017
2018
2016
(In thousands)
Current income tax expense
Deferred income tax expense (benefit)
Total income tax expense (benefit)
$
$
33,618 $
14,772
48,390 $
19,101 $
(3,658)
15,443 $
2,768
23,226
25,994
In relation to the exempt income level, the Bank’s investment securities portfolio and loans portfolio generated net tax-exempt interest
income of $11.0 million at 2018 and $10.0 million at both, 2017 and 2016. OIB generated exempt income of $5.3 million, $9.6
million and $10.3 million for 2018, 2017 and 2016, respectively.
Oriental maintained an effective tax rate lower than statutory rate for the year ended December 31, 2018, mainly by investing in tax-
exempt obligations, doing business through its international banking entity Oriental International Bank and by expanding its
subsidiary operations in the U.S., which are taxed at a lower rate.
Oriental’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes
as follow:
2018
Amount
Rate
Year Ended December 31,
2017
Amount
Rate
(Dollars in thousands)
2016
Amount
Rate
$
Income tax expense 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
Capital (gain) loss at preferential rate
Effect of change in tax rate
Other items, net
51,792
(6,645)
269
1,504
(386)
(20)
4,069
(2,193)
39.00% $
-5.01%
0.20%
1.13%
-0.29%
-0.02%
3.06%
-1.63%
26,555
(9,506)
281
(305)
(775)
(279)
-
(528)
39.00% $
-13.96%
0.41%
-0.45%
-1.14%
-0.41%
0.00%
-0.79%
33,220
(11,178)
1,406
(9)
(135)
2,394
-
296
39.00%
-13.12%
1.65%
-0.01%
-0.16%
2.81%
0.00%
0.34%
Income tax expense
$
48,390
36.44% $
15,443
22.66% $
25,994
30.51%
Oriental’s effective tax rate for the years ended December 31, 2018 was 36.44%, and it was mainly affected by the discrete tax
adjustments related to recent changes in the tax legislation and changes to the proportion of exempt income to total income. For the
years ended December 31, 2017 and 2016, effective tax rate was 22.7% and 30.5%, respectively. On December 10, 2018, the Puerto
175
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Rico government enacted Act 257-2018 introducing several amendments to the Puerto Rico Code. Some of the most relevant income
tax changes include: a reduction of the maximum corporate income tax rate to 37.5%, from 39%, and a restriction of the use of
partnership gains to offset current and accumulated operating losses generated by a corporate partner. The change in tax rate resulted
in the reduction of Oriental’s deferred tax assets by $4.1 million, generating a discrete tax expense for the period. In addition, the
restriction on the use of partnership gains to offset the partner’s current and accumulated operating losses, resulted in a change in
outlook as to the realizability of the Holding company’s deferred tax assets resulting in an increase in valuation allowance of $1.5
million. The 2018 effective tax rate included discrete items and the impact of recent tax legislation changes, that increased the
effective tax rate by 2.8%. Act 257-2018 also contains other provisions, effective January 1, 2019, however Oriental’s does not expect
that the recent tax legislation will result in significant changes on its 2019 effective tax rate.
Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax
rate if realized. At December 31, 2018, the amount of unrecognized tax benefits was $875 thousand (December 31, 2017 - $1.3
million). Oriental had accrued $81 thousand at December 31, 2018 (December 31, 2017 - $97 thousand) for the payment of interest
and penalties relating to unrecognized tax benefits and released $466 thousand due to expiration of statute of limitation.
The following table presents a reconciliation of unrecognized tax benefits:
2018
Year Ended December 31,
2017
In thousands)
2016
Balance at beginning of year
Additions for tax positions of prior years
Additions due to new tax positions
Reduction for tax positions as a result of lapse of statute of limitations
$
1,260 $
81
-
(466)
2,040 $
97
-
(877)
2,175
229
999
(1,363)
Balance at end of year
$
875 $
1,260 $
2,040
Oriental follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The amount of unrecognized tax benefits may
increase or decrease in the future due to new or current tax year positions, expiration of open income tax returns, changes in
management’s judgment about the level of uncertainty, status of examinations, litigations and legislative activity.
The statute of limitations under the Puerto Rico Code is four years and the statute of limitations for federal tax purposes is three years,
after a tax return is due or filed, whichever is later. Oriental is potentially subject to income tax audits in the Commonwealth of Puerto
Rico for taxable years 2014 to 2017, until the applicable statute of limitations expires. In addition, Oriental’s US subsidiaries are
potentially subject to income tax audits by the IRS for taxable years 2015 to 2017. Tax audits by their nature are often complex and
can require several years to complete.
The determination of the deferred tax expense or benefit is generally based on changes in the carrying amounts of assets and liabilities
that generate temporary differences. The carrying value of Oriental’s net deferred tax assets assumes that Oriental will be able to generate
sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future,
Oriental may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the
consolidated statements of operations. Significant components of Oriental’s deferred tax assets and liabilities as of December 31, 2018,
and 2017 were as follows:
176
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred tax asset:
Allowance for loan and lease losses and other reserves
Loans and other real estate valuation adjustment
Net operating loss carry forwards
Alternative minimum tax
Acquired portfolio
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
Building valuation ajustment
Servicing asset
Other deferred tax liabilities
Total gross deferred tax liabilities
$
December 31,
2018
2017
(In thousands)
$
85,227
7,842
5,466
14,631
35,753
966
5,298
155,183
(4,629)
150,554
(22,825)
(1,263)
(8,284)
(4,018)
(401)
(36,791) $
97,682
10,457
5,169
15,672
35,293
858
5,304
170,435
(3,135)
167,300
(24,564)
(1,828)
(9,069)
(3,830)
(588)
(39,879)
Net deferred tax asset
$
113,763
$
127,421
As of December 31, 2018 and 2017, Oriental's net deferred tax asset, net of a valuation allowance of $4.6 million and $3.1 million,
respectively, amounted to $113.8 million and $127.4 million, respectively. As discussed above, the deferred tax assets as of December
31, 2018 are affected by a change in tax legislation which resulted in a reduction of $4.1 million in deferred tax assets and an increase
in valuation allowance of $1.5 million. The increase in valuation allowance was related to a change in outlook as to the realizability of
the Holding company’s deferred tax assets. In assessing the realizability of the deferred tax asset, management considers whether it is
more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax
asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in
making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax asset are deductible, management believes it is more
likely than not that Oriental will realize the benefits of these deductible differences, net of the existing valuation allowances, at
December 31, 2018. 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.
177
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 20 — REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital Requirements
OFG Bancorp (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal
and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Oriental’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Oriental and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules based on the framework of the Basel Committee on
Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”),
which became effective January 1, 2015 for Oriental and the Bank (subject to certain phase-in periods through January 1, 2019) and
that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other
matters, the Basel III capital rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1
capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and
adjustments to capital as compared to prior regulations. The Basel III capital rules prescribe a new standardized approach for risk
weightings that expand the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to
a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a
variety of asset classes.
Pursuant to the Basel III capital rules, the minimum capital ratios requirements are as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known
as the “leverage ratio”).
As of December 31, 2018 and 2017, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As
of December 31, 2018 and 2017, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be
categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier
1 leverage ratios as set forth in the tables presented below.
178
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017 are as follows:
Actual
Amount
Ratio
Minimum Capital
Requirement
Ratio
Amount
(Dollars in thousands)
Minimum to be Well
Capitalized
Amount
Ratio
OFG Bancorp Ratios
As of December 31, 2018
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, 2017
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
$
$
$
$
$
$
$
$
990,499
928,577
20.48% $
19.20% $
386,977
290,233
8.00% $
6.00% $
483,721
386,977
10.00%
8.00%
811,707
928,577
16.78% $
14.22% $
217,675
261,125
4.50% $
4.00% $
314,419
326,406
6.50%
5.00%
899,258
842,133
20.34% $
19.05% $
353,653
265,240
8.00% $
6.00% $
442,067
353,653
10.00%
8.00%
644,804
842,133
14.59% $
13.92% $
198,930
242,057
4.50% $
4.00% $
287,343
302,571
6.50%
5.00%
Actual
Amount
Ratio
Minimum Capital
Requirement
Ratio
Amount
(Dollars in thousands)
Minimum to be Well
Capitalized
Amount
Ratio
Bank Ratios
As of December 31, 2018
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, 2017
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
$
$
$
$
$
$
$
$
949,596
887,918
19.68% $
18.40% $
385,992
289,494
8.00% $
6.00% $
482,490
385,992
10.00%
8.00%
887,918
887,918
18.40% $
13.68% $
217,120
259,547
4.50% $
4.00% $
313,618
324,434
6.50%
5.00%
879,648
822,776
19.92% $
18.63% $
353,265
264,949
8.00% $
6.00% $
441,581
353,265
10.00%
8.00%
822,776
822,776
18.63% $
13.63% $
198,712
241,417
4.50% $
4.00% $
287,028
301,771
6.50%
5.00%
179
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 21 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, and dividend equivalents, as well as equity-based performance awards.
The activity in outstanding options for the years ended December 31, 2018, 2017, and 2016 is set forth below:
Year Ended December 31,
2018
2017
2016
Number
Of
Options
Weighted
Average
Exercise
Price
Number
Of
Options
Weighted
Average
Exercise
Price
Number
Of
Options
Weighted
Average
Exercise
Price
845,619
$
(101,268)
(5,025)
739,326
$
14.14
13.41
17.05
14.28
917,269
$
(71,150)
(500)
845,619
$
14.08
12.96
15.26
14.14
951,523
$
(24,752)
(9,502)
917,269
$
12.45
12.43
16.65
14.08
Beginning of year
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, 2018:
Range of Exercise Prices
$5.63 to $8.45
11.27 to 14.08
14.09 to 16.90
16.91 to 19.71
Outstanding
Exercisable
Weighted
Average
Contract Life
Remaining
Weighted
Average
Exercise Price
(Years)
8.28
11.81
15.40
17.00
14.28
0.3
2.2
4.7
6.2
3.9
Number of
Options
3,532
313,394
265,675
156,725
739,326 $
Number of
Options
Weighted
Average
Exercise Price
3,532
313,394
228,625
78,362
623,913 $
8.28
11.81
15.29
17.44
13.77
Aggregate Intrinsic Value
$
1,767,596
$
1,754,258
There were no options granted during 2018, 2017 and 2016. The average fair value of each option granted would have been estimated
at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use
in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market.
Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in Oriental’s stock options. Use of
an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including
the expected stock price volatility and average life of each option grant.
The following table summarizes the activity in restricted units under the Omnibus Plan for the years ended December 31, 2018, 2017
and 2016:
180
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2018
Weighted
Average
Year Ended December 31,
2017
Weighted
Average
2016
Weighted
Average
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
105,800 $
176,250
(24,017)
(3,983)
254,050 $
14.19
12.12
17.12
12.48
12.50
59,800 $
83,000
(33,100)
(3,900)
105,800 $
16.64
13.31
16.10
16.79
14.19
138,400 $
-
(76,903)
(1,697)
59,800 $
16.17
-
16.04
17.02
16.64
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, 2018 was
$2.3 million and is expected to be recognized over a weighted-average period of 1.8 years.
181
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 22 – STOCKHOLDERS’ EQUITY
Preferred Stock and Common Stock
On October 22, 2018, Oriental announced the mandatory conversion of its Series C preferred stock into common stock. Each share of
Series C preferred stock was converted into 86.4225 shares of common stock. There were 84,000 shares of Series C preferred stock
outstanding, all of which were converted to common stock. Upon conversion, the Series C preferred stock is no longer outstanding
and all rights with respect to the Series C preferred stock have ceased and terminated, except the right to receive the number of whole
shares of common stock issuable upon conversion of the Series C preferred stock and any required cash-in-lieu of fractional shares. At
December 31, 2018 preferred and common stock paid-in capital amounted $92.0 million and $59.9 million, respectively. At December
31, 2017, preferred and common stock paid-in capital amounted $176.0 and $52.6 million, respectively.
Additional Paid-in Capital
Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of
issuance. As of both December 31, 2018 and 2017, accumulated issuance costs charged against additional paid-in capital amounted to
$13.6 million and $10.1 million for preferred and common stock, respectively.
Legal Surplus
The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund
until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2018 and 2017, the
Bank’s legal surplus amounted to $90.2 million and $81.5 million, respectively. The amount transferred to the legal surplus account is
not available for the payment of dividends to shareholders.
Treasury Stock
Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $7.7 million of its outstanding
shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. During the years ended
December 31, 2018, 2017 and 2016, Oriental did not repurchase any shares under the program.
At December 31, 2018 the number of shares that may yet be purchased under the $70 million program is estimated at 469,675 and was
calculated by dividing the remaining balance of $7.7 million by $16.46 (closing price of Oriental's common stock at December 31,
2018).
The activity in connection with common shares held in treasury by Oriental for the years ended December 31, 2018, 2017 and 2016 is
set forth below:
2018
Year Ended December 31,
2017
2016
Shares
Dollar
Amount
Shares
Dollar
Amount
Shares
Dollar
Amount
Beginning of period
8,678,427
$ 104,502
(In thousands, except shares data)
8,711,025 $ 104,860
8,757,960 $ 105,379
Common shares used upon lapse of restricted
stock units
End of period
(46,935)
(519)
8,711,025 $ 104,860
(87,117)
(869)
(32,598)
(358)
8,591,310
$ 103,633
8,678,427 $ 104,502
182
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 23 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of income taxes, as of December 31, 2018 and 2017 consisted of:
Unrealized loss on securities available-for-sale which are not
other-than-temporarily impaired
Income tax effect of unrealized loss on securities available-for-sale
Net unrealized gain on securities available-for-sale which are not
other-than-temporarily impaired
Unrealized gain (loss) on cash flow hedges
Income tax effect of unrealized (gain) loss on cash flow hedges
Net unrealized gain (loss) on cash flow hedges
Accumulated other comprehensive (loss), net of income taxes
$
$
December 31,
2018
2017
(In thousands)
(12,654) $
1,682
(10,972)
14
(5)
9
(10,963) $
(3,003)
365
(2,638)
(510)
199
(311)
(2,949)
183
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, 2018, 2017 and 2016:
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other
comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other
comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
$
$
$
$
Net unrealized
gains on
securities
Year Ended December 31, 2018
Net unrealized
loss on
cash flow
Accumulated
other
comprehensive
available-for-sale
hedges
(loss) income
(In thousands)
(2,638) $
(311) $
(8,104)
(1,555)
(230)
(8,334)
(10,972) $
1,875
320
9 $
(2,949)
(9,659)
1,645
(8,014)
(10,963)
Net unrealized
gains on
securities
available-for-sale
Year Ended December 31, 2017
Net unrealized
loss on
cash flow
hedges
(In thousands)
Accumulated
other
comprehensive
(loss) income
2,209 $
(11,563)
6,716
(4,847)
(2,638) $
(613) $
(186)
488
302
(311) $
1,596
(11,749)
7,204
(4,545)
(2,949)
184
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net unrealized
gains on
securities
available-for-sale
Year Ended December 31, 2016
Net unrealized
loss on
cash flow
hedges
(In thousands)
Accumulated
other
comprehensive
(loss) income
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other
comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
$
$
16,924
(26,661)
11,946
(14,715)
2,209 $
(2,927)
(1,628)
3,942
2,314
(613) $
13,997
(28,289)
15,888
(12,401)
1,596
The following table presents reclassifications out of accumulated other comprehensive income for the years ended December 31,
2018, 2017 and 2016:
Amount reclassified out of accumulated
other comprehensive income
Year Ended December 31,
2017
(In thousands)
2016
2018
Affected Line Item in
Consolidated
Statement of
Operations
Cash flow hedges:
Interest-rate contracts
Tax effect from changes in tax rates
Available-for-sale securities:
Gain on sale of investments
Residual tax effect from OIB's change in applicable
tax rate
Tax effect from changes in tax rates
$
$
1,875 $
-
488 $
-
3,642
300 Income tax expense
Net interest expense
-
6,896
12,207
5
(235)
1,645 $
104
(284)
7,204 $
Net impairment losses
recognized in earnings
32
(293) Income tax expense
15,888
185
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 24 – EARNINGS PER COMMON SHARE
The calculation of earnings per common share for the years ended December 31, 2018, 2017 and 2016 is as follows:
Net income
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B,
and D)
Convertible preferred stock (Series C)
Income available to common shareholders
Effect of assumed conversion of the convertible
preferred stock
Income available to common shareholders
assuming conversion
Weighted average common shares and share
equivalents:
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
2018
Year Ended December 31,
2017
(In thousands, except per share data)
2016
$
84,410
$
52,646
$
59,186
(6,511)
(5,513)
72,386
$
(6,512)
(7,350)
38,784
$
5,513
7,350
(6,512)
(7,350)
45,324
7,350
77,899
$
46,134
$
52,674
$
$
45,400
43,939
43,913
142
5,807
19
7,138
51,349
51,096
37
7,138
51,088
1.03
1.03
Earnings per common share - basic
Earnings per common share - diluted
$
$
1.59
$
1.52
$
0.88
$
0.88
$
186
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the last quarter of 2018, Oriental converted all of its outstanding Series C Preferred Stock into Oriental common stock. Each of
the 84,000 Series C Preferred Stock shares were converted into 86.4225 shares of common stock. In computing diluted earnings per
common share during 2016, 2017 and the first nine months of 2018, the 84,000 shares of Series C Preferred Stock that remained
outstanding, with a conversion rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as
average potential common shares from the date they were issued and outstanding. Moreover, in computing diluted earnings per
common share, the dividends declared during the years ended December 31, 2018, 2017 and 2016 on the convertible preferred stock
were added back as income available to common shareholders.
For the years ended December 31, 2018, 2017 and 2016, weighted-average stock options with an anti-dilutive effect on earnings per
share not included in the calculation amounted to 432,522, 932,306, and 949,134, respectively.
NOTE 25 – GUARANTEES
At December 31, 2018 and 2017, the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters
of credit represented a liability of $23.9 million and $21.1 million, respectively.
Oriental has a liability for residential mortgage loans sold subject to credit recourse pursuant to FNMA’s residential mortgage loan
sales and securitization programs. At December 31, 2018 and 2017, the unpaid principal balance of residential mortgage loans sold
subject to credit recourse was $5.4 million and $6.4 million, respectively.
The following table shows the changes in Oriental’s liability for estimated losses from these credit recourse agreements, included in
the consolidated statements of financial condition during the years ended December 31, 2018, 2017 and 2016.
Year Ended December 31,
2018
2017
2016
Balance at beginning of period
Net (charge-offs/terminations) recoveries
Balance at end of period
$
$
358 $
(12)
346 $
710 $
(352)
358 $
439
271
710
The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was
assumed, and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan,
considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing
would become 120 days delinquent, in which case Oriental is obligated to repurchase the loan.
If a borrower defaults, pursuant to the credit recourse provided, Oriental is required to repurchase the loan or reimburse the third-party
investor for the incurred loss. The maximum potential amount of future payments that Oriental would be required to make under the
recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and
interest, if applicable. During 2018, Oriental repurchased approximately $705 thousand of unpaid principal balance in mortgage loans
subject to the credit recourse provisions. During 2017, Oriental repurchased $107 thousand of unpaid principal balance in mortgage
loans subject to the credit recourse provisions. If a borrower defaults, Oriental has rights to the underlying collateral securing the
mortgage loan. Oriental suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are
less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the
related property. At December 31, 2018, Oriental’s liability for estimated credit losses related to loans sold with credit recourse
amounted to $346 thousand (December 31, 2017– $358 thousand).
When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the
characteristics of the loans sold. Oriental's mortgage operations division groups conforming mortgage loans into pools which are
exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to
FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are
performed by Oriental to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified
characteristics, Oriental may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the
loans. During the year ended December 31, 2018, Oriental repurchased $7.7 million (December 31, 2017 – $3.1 million) of unpaid
principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.
187
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2018, 2017, and 2016, Oriental recognized $556 thousand, $260 thousand and $380 thousand, respectively, in losses from the
repurchase of residential mortgage loans sold subject to credit recourse, and $160 thousand, $477 thousand and $1.3 million,
respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and
warranties.
Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or
serviced to certain other investors, including the FHLMC, require Oriental to advance funds to make scheduled payments of principal,
interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2018, Oriental serviced
$895.6 million (December 31, 2017 - $864.9 million) in mortgage loans for third-parties. Oriental generally recovers funds advanced
pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the
case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, Oriental
must absorb the cost of the funds it advances during the time the advance is outstanding. Oriental must also bear the costs of
attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would
be canceled as part of the foreclosure proceedings and Oriental would not receive any future servicing income with respect to that
loan. At December 31, 2018, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements
was approximately $706 thousand (December 31, 2017 - $440 thousand). To the extent the mortgage loans underlying Oriental's
servicing portfolio experience increased delinquencies, Oriental would be required to dedicate additional cash resources to comply
with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
NOTE 26— COMMITMENTS AND CONTINGENCIES
Loan Commitments
In the normal course of business, Oriental becomes a party to credit-related financial instruments with off-balance-sheet risk to meet
the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial
letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those
instruments reflects the extent of Oriental’s involvement in particular types of financial instruments.
Oriental’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to
extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the
contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In
addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting
transactions are identified. Oriental uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
188
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit-related financial instruments at December 31, 2018 and 2017 were as follows:
December 31,
2018
2017
(In thousands)
Commitments to extend credit
Commercial letters of credit
$
541,423
340
$
485,019
494
Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Oriental evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by Oriental upon the extension of credit, is based on management’s credit evaluation of the counterparty.
At December 31, 2018 and 2017, commitments to extend credit consisted mainly of undisbursed available amounts on commercial
lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to
expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash
requirements. These lines of credit had a reserve of $627 thousand and $567 thousand, at December 31, 2018 and 2017, respectively.
Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term
international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended.
However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.
The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to
guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at
December 31, 2018 and 2017, is as follows:
December 31,
2018
2017
(In thousands)
Standby letters of credit and financial guarantees
Loans sold with recourse
$
23,889 $
5,414
21,107
6,420
Standby letters of credit and financial guarantees are written conditional commitments issued by Oriental to guarantee the payment
and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary
may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of
credit in the event of nonperformance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily
issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
The amount of collateral obtained, if it is deemed necessary by Oriental upon extension of credit, is based on management’s credit
evaluation of the customer.
189
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Lease Commitments
Oriental has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the years
ended December 31, 2018, 2017, and 2016, amounted to $9.0 million, $9.9 million and $8.5 million, respectively, and is included in
the "occupancy and equipment" caption in the unaudited consolidated statements of operations. Future rental commitments under
leases in effect at December 31, 2018, exclusive of taxes, insurance, and maintenance expenses payable by Oriental, are summarized
as follows:
Minimum
Rent
(In thousands)
5,618
$
4,293
3,360
2,494
1,968
6,679
24,412
$
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Contingencies
Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of
business, Oriental and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of Oriental,
including the Bank (and its subsidiary, OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various
U.S., Puerto Rico and other regulators.
Oriental seeks to resolve all arbitration, litigation and regulatory matters in the manner management believes is in the best interests of
Oriental and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or
scope of any penalties or other relief sought as appropriate in each pending matter.
Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of Oriental’s management,
based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not
be likely to have a material adverse effect on the consolidated statements of financial condition of Oriental. Nonetheless, given the
substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse
outcome in certain of these matters could, from time to time, have a material adverse effect on Oriental’s consolidated results of
operations or cash flows in particular quarterly or annual periods. Oriental has evaluated all arbitration, litigation and regulatory
matters where the likelihood of a potential loss is deemed reasonably possible. Oriental has determined that the estimate of the
reasonably possible loss is not significant.
190
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 27 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Oriental follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”).
Fair Value Measurement
The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Money market investments
The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial
condition as these are reasonable estimates of fair value given the short-term nature of the instruments.
Investment securities
The fair value of investment securities is based on quoted market prices, when available, or market prices provided by Interactive Data
Corporation ("IDC"), an independent, well-recognized pricing company. Such securities are classified as Level 1 or Level 2
depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally
developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such
securities are classified as Level 3. At December 31, 2018 and 2017, Oriental did not have investment securities classified as Level 3.
Securities purchased under agreements to resell
The fair value of securities purchased under agreements to resell is based on the carrying amounts reflected in the consolidated
statements of financial condition as these are reasonable estimates of fair value given the short-term nature of instruments.
Derivative instruments
The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of
interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on
earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for
rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include
discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account
for the industry sector and the credit rating of the counterparty and/or Oriental. Certain other derivative instruments with limited
market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation
methodology, derivative instruments are classified as Level 2 or Level 3.
Servicing assets
Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash
flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late
charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation
inputs, the servicing rights are classified as Level 3.
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
191
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the
collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in
similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans
considered impaired are classified as Level 3.
Foreclosed real estate
Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed
real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are
classified as Level 3 given certain internal adjustments that may be made to external appraisals.
Other repossessed assets
Other repossessed assets include repossessed automobiles. The fair value of the repossessed automobiles may be determined using
internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that
may be made to external appraisals.
Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:
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, 2018
Fair Value Measurements
Level 3
Level 2
(In thousands)
Total
$
$
$
$
-
-
4,930
-
-
-
4,930
-
-
-
-
$
$
$
$
841,857
360
-
347
-
(333)
842,231
-
-
-
-
$
$
$
$
-
-
-
-
10,716
-
10,716
81,976
33,768
2,986
118,730
$
$
$
$
841,857
360
4,930
347
10,716
(333)
857,877
81,976
33,768
2,986
118,730
192
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2017
Fair Value Measurements
Level 3
Level 2
(In thousands)
Total
$
$
$
$
-
-
7,021
-
-
-
7,021
-
-
-
-
$
$
$
$
645,797
191
-
771
-
(1,281)
645,478
-
-
-
-
$
$
$
$
-
-
-
-
9,821
-
9,821
72,285
44,174
3,548
120,007
$
$
$
$
645,797
191
7,021
771
9,821
(1,281)
662,320
72,285
44,174
3,548
120,007
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2018, 2017 and 2016:
Level 3 Instruments Only
Balance at beginning of period
New instruments acquired
Principal repayments
Changes in fair value of servicing assets
Balance at end of period
Servicing Assets
(In thousands)
Year Ended December 31,
2018
2017
$
$
9,821 $
1,481
(814)
228
10,716 $
9,858
1,658
(590)
(1,105)
9,821
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
Year Ended December 31, 2016
Derivative asset
(S&P Purchased
Options)
Servicing Assets
Derivative
liability
(S&P
Embeded
Options)
Total
$
$
1,171 $
(1,171)
-
-
-
-
- $
(In thousands)
7,455 $
-
2,616
(489)
-
276
9,858 $
(1,095) $
1,067
-
-
28
-
- $
7,531
(104)
2,616
(489)
28
276
9,858
During the years ended December 31, 2018, 2017 and 2016, 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.
193
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, 2018:
Fair Value
Valuation Technique
Unobservable Input
Range
December 31, 2018
(In
thousands)
Servicing assets
$
10,716 Cash flow valuation
Constant prepayment rate
Discount rate
4.30% -9.02%
10.00% - 12.00%
Collateral dependent
impaired loans
$
36,618
Fair value of property
or collateral
Appraised value less
disposition costs
17.20% - 36.20%
Other non-collateral
dependent impaired loans $
45,358 Cash flow valuation
Discount rate
4.25% - 12.25%
Foreclosed real estate
$
33,768
Fair value of property
or collateral
Appraised value less
disposition costs
17.20% - 36.20%
Other repossessed assets
$
2,986
Fair value of property
or collateral
Estimated net realizable
value less disposition costs
38.00% - 62.00%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Servicing assets – The significant unobservable inputs used in the fair value measurement of Oriental’s servicing assets are constant
prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of
total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in
the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions
(principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to
collection/realization of expected cash flows.
Fair Value of Financial Instruments
The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair
value amounts presented do not necessarily represent management’s estimate of the underlying value of Oriental.
The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into
consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant
tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail
deposits, and premises and equipment.
194
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair value and carrying value of Oriental’s financial instruments at December 31, 2018 and 2017 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)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
December 31,
2018
2017
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
(In thousands)
447,033 $
3,030 $
447,033
$
3,030 $
485,203 $
3,030 $
485,203
3,030
360 $
841,857 $
410,353 $
12,644 $
3 $
347 $
360
$
841,857 $
$
424,740
12,644 $
3
$
347 $
191 $
645,797 $
497,681 $
13,995 $
3 $
771 $
191
645,797
506,064
13,995
3
771
333 $
333 $
1,281 $
1,281
4,106,628 $
34,254 $
10,716 $
37,842 $
4,431,594
$
34,254 $
10,716
$
37,842 $
3,842,907 $
49,969 $
9,821 $
41,898 $
4,881,903 $
453,135 $
78,503 $
1,214 $
36,184 $
87,665 $
4,908,115 $
$
455,508
77,620 $
1,214
$
36,083 $
$
87,665
4,782,197 $
191,104 $
99,509 $
153 $
33,080 $
86,791 $
4,056,329
49,969
9,821
41,898
4,799,482
192,869
99,643
153
36,083
86,791
195
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,
2018 and 2017:
• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued
interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the carrying
amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the
short-term nature of the instruments.
• Investments in FHLB-NY stock are valued at their redemption value.
• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when
available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed
prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable
inputs depending on the market activity of the instrument.
• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing
costs, and other economic factors, which are determined based on current market conditions.
• The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited
market activity are valued using externally developed models that consider unobservable market parameters.
• Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted
value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows
are based on the forward yield curve, and discounted using current estimated market rates.
• The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price,
which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is
further segmented into fixed and adjustable interest rates. The fair value is calculated by discounting contractual cash flows,
adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the
credit and interest rate risk inherent in the loan.
• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market
discount rates for deposits of similar remaining maturities.
• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and
subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount
rates for borrowings with similar terms, remaining maturities and put dates.
196
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 28 – BANKING AND FINANCIAL SERVICE REVENUES
The following table presents the major categories of banking and financial service revenues for the years ended December 31, 2018,
2017 and 2016:
Banking service revenues:
Checking accounts fees
Savings accounts fees
Electronic banking fees
Credit life commissions
Branch service commissions
Servicing and other loan fees
International fees
Miscellaneous income
2018
Year Ended December 31,
2017
(In thousands)
2016
$
5,878 $
6,903 $
635
32,431
541
1,581
1,844
718
10
601
28,174
492
811
1,758
712
17
7,511
548
30,081
636
620
1,689
528
34
Total banking service revenues
43,638
39,468
41,647
Wealth management revenue:
Insurance income
Broker fees
Trust fees
Retirement plan and administration fees
Investment banking fees
Total wealth management revenue
Mortgage banking activities:
Net servicing fees
Net gains on sale of mortgage loans and valuation
Other
Total mortgage banking activities
6,956
6,996
10,878
1,095
9
25,934
5,024
305
(562)
4,767
6,652
7,131
10,930
1,048
29
25,790
3,865
923
(738)
4,050
Total banking and financial service revenues
$
74,339 $
69,308 $
7,287
8,385
10,789
971
1
27,433
6,058
693
(1,730)
5,021
74,101
In May 2014 issued ASU No. 2014-09 - Revenue from Contracts with Customers (ASC 606) to clarify the principles for recognizing
revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, provide a more robust
framework for addressing the revenue issues, improve comparability in revenue recognition and to simplify the preparation of financial
statements by reducing the number of requirements t which an entity must refer.
The standard defines revenue (ASC-606-10-20) as inflows or other enhancements of assets of an entity or settlements of its liabilities
(or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing
major or central operations.
Revenue is recognized when (or as) the performance obligation is satisfied by transferring control of a promised good or service to a
customer, either at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also
recognized over time.
197
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Following is a description of the nature and timing of revenue streams from contracts with customers:
Banking Revenue Services
• Electronic banking fees are credit and debit card processing services, use of the Bank’s ATMs by non-customers, debit card
interchange income and service charges on deposits accounts. Revenue is recorded once the contracted service has been
provided.
• Service charges on checking and saving accounts as consumer periodic maintenance revenue is recognized once the service is
rendered, while overdraft and late charges revenue are recorded after the contracted service has been provided.
• Other income as credit life commissions, servicing and other loan fees, international fees, and miscellaneous fees recognized
as banking revenue services are out of the scope of the 606 guideline.
Wealth Management Revenue
•
Insurance income from commissions and sale of annuities are recorded once the sale has been completed.
• Brokers fees consist of two categories:
- Wealth management service revenue subject to commission represents sales commissions generated by advisors for
their clients’ purchases and sales of securities on exchanges and over-the-counter, as well as purchases of other
investment products like mutual funds, and are collected once the stand alone transactions are completed at trade date
or as earned. Also, managed account fees which are fees charged to advisors’ clients’ accounts on the Company
corporate advisory platform. Fees do not cover future services, as a result there is no need to allocate the amount
received to any other service.
- Wealth management service revenue not subject to commission are primarily revenues from transactions related to
mutual funds for providing distribution services and, in turn, compensates service provider who entered into
agreements with the Company to provide such services netted against revenues, as well as trailer fees (also known as
12-b1 fess). These fees are considered variable and are recognized over time, as the uncertainty of the fees to be
received is resolved as NAV is determined and investor activity occurs. Fees do not cover future services, as a result
there is no need to allocate the amount received to any other service.
• Retirement plan and administration fees are revenues related to the payment received from the clients of OPC for provide
assistance with the planning, design, administration, act as third party administrator, daily record keeping services of retirement
plans. Fees are collected once the stand alone transaction was completed at trade date. Fees do not cover future services, as a
result there is no need to allocate the amount received to any other service.
• Trust fees are revenues related to the full fiduciary services of 401k, the dividend growth IRA, and retirement plans which
include investment management, payment of distributions, if any, safekeeping, custodial services of plan assets, servicing of
Trust officers, on-going due diligence of the Trust, and recordkeeping of transactions. Fees are billed based on services
contracted. Negotiated fees are detailed in the contract. Fees collected in advance, are amortized over the term of the contract.
Fees are collected on a monthly basis once the administrative service has been completed. Monthly fee does not include future
services.
•
Investment banking fees as compensation fees are out of the scope of the 606 guideline.
Mortgage Banking Activities
• Mortgage banking activities as servicing fees, gain on sale of mortgage loans valuation and other are out of the scope of the
606 guideline.
198
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 29 – BUSINESS SEGMENTS
Oriental segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and
Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess
where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic
characteristics of the products were also considered in the determination of the reportable segments. Oriental measures the
performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net
interest income, loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is
based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These
factors are reviewed on a periodical basis and may change if the conditions warrant.
Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage
loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate
mortgage loans for Oriental’s own portfolio. As part of its mortgage banking activities, Oriental may sell loans directly into the
secondary market or securitize conforming loans into mortgage-backed securities.
Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core
operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales
activity, corporate and individual trust and retirement services, as well as retirement plan administration services.
The Treasury segment encompasses all of Oriental’s asset/liability management activities, such as purchases and sales of investment
securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if
the sales or transfers were to third parties, that is, at current market prices.
199
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,
2018, 2017 and 2016:
Wealth
Manageme
nt
Banking
Year Ended December 31, 2018
Total
Major
Consolidated
Treasury
Segments
Eliminations
Total
(In thousands)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses, net
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Income tax expense
Net income
$ 320,084 $
(29,746)
290,338
(55,885)
53,592
(186,460)
2,126
-
$ 103,711 $
40,447
63,264 $
$
46 $
-
46
-
26,457
(16,440)
-
(788)
9,275 $
3,617
5,658 $
(44,525)
315,894
(56,108)
80,095
(207,081)
2,126
(2,126)
40,289 $ 360,419 $
(14,779)
25,510
(223)
46
(4,181)
-
(1,338)
19,814 $ 132,800 $
4,326
15,488 $
48,390
84,410 $
- $
-
-
-
-
-
(2,126)
2,126
- $
-
- $
360,419
(44,525)
315,894
(56,108)
80,095
(207,081)
-
-
132,800
48,390
84,410
Total assets
$ 5,863,067 $
25,757 $
5 $ 7,597,279 $ (1,013,927) $
6,583,352
1,708,45
Wealth
Manageme
nt
Banking
Year Ended December 31, 2017
Total
Major
Consolidated
Treasury
Segments
Eliminations
Total
Interest income
Interest expense
Net interest income
Provision for loan and lease losses, net
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Income tax expense (benefit)
Net income
$ 311,503 $
(26,308)
285,195
(113,108)
45,102
(184,567)
1,604
(748)
33,478 $
13,057
20,421 $
$
$
53 $
-
53
-
26,069
(13,486)
-
(1,137)
11,499 $
4,485
7,014 $
(In thousands)
34,091 $ 345,647 $
(15,167)
18,924
(31)
7,516
(3,578)
748
(467)
23,112 $
(2,099)
25,211 $
(41,475)
304,172
(113,139)
78,687
(201,631)
2,352
(2,352)
68,089 $
15,443
52,646 $
1,536,41
- $
-
-
-
-
-
(2,352)
2,352
- $
-
- $
345,647
(41,475)
304,172
(113,139)
78,687
(201,631)
-
-
68,089
15,443
52,646
Total assets
$ 5,597,077 $
25,980 $
7 $ 7,159,474 $
(970,421) $
6,189,053
200
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Wealth
Managemen
t
Banking
Year Ended December 31, 2016
Total Major
Consolidated
Treasury
Segments
Eliminations
Total
(In thousands)
Interest income
Interest expense
Net interest income
Provision for non-covered loan and lease
losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Income tax expense (benefit)
Net income
$
321,868 $
(27,838)
294,030
65 $
-
65
34,659 $
(29,327)
5,332
356,592 $
(57,165)
299,427
(65,076)
35,587
(193,156)
1,521
(883)
72,023 $
28,089
43,934 $
$
$
-
26,788
(17,443)
-
(1,108)
8,302 $
3,238
5,064 $
-
4,444
(5,391)
883
(413)
4,855 $
(5,333)
10,188 $
(65,076)
66,819
(215,990)
2,404
(2,404)
85,180 $
25,994
59,186 $
- $
-
-
-
-
-
(2,404)
2,404
- $
-
- $
356,592
(57,165)
299,427
(65,076)
66,819
(215,990)
-
-
85,180
25,994
59,186
Total assets
$ 5,584,866 $
23,315 $ 1,837,514 $ 7,445,695 $
(943,871) $
6,501,824
201
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 30 – OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
As a bank holding company subject to the regulations and supervisory guidance of the Federal Reserve Board, Oriental generally
should inform the Federal Reserve Board and eliminate, defer or significantly reduce its dividends if: (i) its net income available to
shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
(ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial
condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The payment of
dividends by the Bank to Oriental may also be affected by other regulatory requirements and policies, such as the maintenance of
certain regulatory capital levels. During 2018, 2017 and 2016, Oriental Insurance paid $4.0 million, $4.0 million and $5.0 million,
respectively, in dividends to Oriental. Oriental Financial Services paid $1.0 million in dividends to Oriental during 2016 but did not
pay any dividends during 2017 and 2018.
The following condensed financial information presents the financial position of the holding company only as of December 31, 2018
and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018, 2017 and 2016:
OFG BANCORP
CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION
(Holding Company Only)
ASSETS
Cash and cash equivalents
Investment in bank subsidiary, equity method
Investment in nonbank subsidiaries, equity method
Due from bank subsidiary,net
Deferred tax asset, net
Other assets
December 31,
2018
2017
(In thousands)
$
$
39,207
983,718
19,341
40
-
1,122
24,430
941,198
20,231
22
2,230
1,616
Total assets
$
1,043,428
$
989,727
LIABILITIES AND STOCKHOLDERS’ EQUITY
Dividend payable
Due to affiliates
Accrued expenses and other liabilities
Subordinated capital notes
Total liabilities
Stockholders’ equity
5,219
14
2,235
36,083
43,551
999,877
6,504
-
2,033
36,083
44,620
945,107
Total liabilities and stockholders’ equity
$
1,043,428
$
989,727
202
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 before income taxes
Income tax expense
Loss before changes in undistributed earnings of subsidiaries
Equity in undistributed earnings from:
Bank subsidiary
Nonbank subsidiaries
Net income
2018
Year Ended December 31,
2017
(In thousands)
2016
$
477 $
-
6,003
6,480
188 $
-
4,511
4,699
1,905
7,980
9,885
(3,405)
2,400
(5,805)
1,556
6,700
8,256
(3,557)
403
(3,960)
87,128
3,087
84,410 $
51,612
4,994
52,646 $
$
174
211
4,066
4,451
1,370
7,179
8,549
(4,098)
518
(4,616)
58,580
5,222
59,186
OFG BANCORP
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME INFORMATION
(Holding Company Only)
Net income
Other comprehensive loss before tax:
Unrealized loss on securities available-for-sale
Other comprehensive income from bank subsidiary
Other comprehensive loss before taxes
Income tax effect
Other comprehensive loss after taxes
Comprehensive income
2018
Year ended December 31,
2017
(In thousands)
2016
$
84,410 $
52,646 $
59,186
-
(8,014)
(8,014)
-
(8,014)
-
(4,545)
(4,545)
-
(4,545)
(204)
(12,238)
(12,442)
41
(12,401)
$
76,396 $
48,101 $
46,785
203
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
Adjustments to reconcile net income 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
Stock-based compensation
Employee benefit adjustment
Deferred income tax, net
Net decrease (increase) in other assets
Net (decrease) increase in accrued expenses and other liabilities
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 in due from bank subsidiary, net
Net decrease in due to non-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 (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from (payments to) exercise of stock options and lapsed restricted
units, net
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
2018
Year Ended December 31,
2017
(In thousands)
2016
$
84,410 $
52,646 $
59,186
(87,128)
(3,087)
-
-
1,401
-
2,230
372
203
37,700
4,000
40,101
-
-
-
14
200
(1,105)
(24)
(97)
(1,012)
(51,612)
(4,994)
-
-
1,109
(99)
414
(205)
(1,185)
26,743
4,002
26,819
-
-
307
-
-
(788)
(50)
(19)
(550)
(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
508
-
(315)
(24,820)
(24,312)
14,777
24,430
39,207 $
(24,412)
(24,412)
1,857
22,573
24,430 $
(24,003)
(24,318)
2,333
20,240
22,573
$
204
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Oriental’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2018, an evaluation was carried out under
the supervision and with the participation of Oriental’s management, including the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”), of the effectiveness of the design and operation of Oriental’s disclosure controls and procedures. Based
upon such evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this annual report on Form 10-K,
Oriental’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by Oriental in the reports that it files or submits under the
Securities Exchange Act of 1934. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that it will detect or uncover failures within Oriental to disclose material information
otherwise required to be set forth in Oriental’s periodic reports.
Management’s Annual Report on Internal Control over Financial Reporting
The Management’s Annual Report on Internal Control over Financial Reporting is included in Item 8 of this report.
Report of the Registered Public Accounting Firm
The registered public accounting firm’s report on Oriental’s internal control over financial reporting is included in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There have not been any changes in Oriental’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the last quarter of the year ended December 31, 2018, that has materially affected, or is
reasonably likely to materially affect, Oriental’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
205
Items 10 through 14 are incorporated herein by reference to Oriental’s definitive proxy statement to be filed with the SEC no later than
120 days after the end of the fiscal year covered by this report, except with respect to the information set forth below under Item 12.
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Oriental’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and
further amended in 2010.
The following table shows certain information pertaining to the awards under the Omnibus Plan as of December 31, 2018:
(a)
(b)
(c)
Number of Securities
Number of Securities to
be
Weighted-Average
Remaining Available for
Issued Upon Exercise of
Exercise Price of
Outstanding Options,
Outstanding
Options,
Warrants and Rights
Warrants and Rights
Future Issuance Under
Equity
Compensation Plans
(excluding
those reflected in column (a))
Plan Category
Equity compensation plans approved by
shareholders:
Omnibus Plan
(1) Includes 739,326 stock options and 254,050 restricted stock units.
(2) Exercise price related to stock options.
993,376 (1) $
$
993,376
10.63 (2) $
10.63
832,146
832,146
Oriental recorded $1.401 million, $1.109 million and $1.270 million related to stock-based compensation expense during the years
ended December 31, 2018, 2017 and 2016, respectively.
Other information required by this Item is incorporated herein by reference to Oriental’s definitive proxy statement to be filed with the
SEC no later than 120 days after the end of the fiscal year covered by this report.
206
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, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Financial Statement Schedules
No schedules are presented because the information is not applicable or is included in the accompanying consolidated financial
statements or in the notes thereto described above.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
207
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
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
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 Oriental 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 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(7)
Form of Certificate for the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(8)
Form of Certificate for the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(9)
Form of Certificate for the 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(7)
Change in Control Compensation Agreement between Oriental and José R. Fernández.(10)
Change in Control Compensation Agreement between Oriental and Ganesh Kumar (11)
Technology Outsourcing Agreement dated as of January 26, 2007, between Oriental and Metavante Corporation.(12)
OFG Bancorp 2007 Omnibus Performance Incentive Polan, as amended and restated.(13)
Form of qualified stock option award and agreement (14)
Form of restricted stock award and agreement (15)
Form of restricted unit award and agreement (16)
Form of performance shares award and agreement (17)
Employment Agreement dated as of February 28, 2018 between Oriental and José R. Fernández (18)
Amendment, effective as of December 19, 2018, to Employment Agreement between Oriental and José R. Fernández
Amendment dated as of May 31, 2018 to Technology Outsourcing Agreement between Oriental and Metavante
Corporation (19)
Termination Agreement, dated as of February 6, 2017, among the Federal Deposit Insurance Corporation, Receiver of
Eurobank, San Juan, Puerto Rico, the Federal Deposit Insurance Corporation, and Oriental Bank (20)
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.
208
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 Oriental’s annual report on Form 10-K for the year ended December 31, 2018, 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 Oriental’s current report on Form 8-K filed with the SEC on May 6, 2010.
Incorporated herein by reference to Exhibit 2.1 of Oriental’s current report on Form 8-K filed with the SEC on July 3, 2012.
Incorporated herein by reference to Exhibit 3.1 of Oriental’s annual report on Form 10-K filed with the SEC on March 14, 2016.
Incorporated herein by reference to Exhibit 3.1 of Oriental’s current report on Form 8-K filed with the SEC on January 30, 2018.
Incorporated herein by reference to Exhibit 4.1 of Oriental’s registration statement on Form 8-A filed with the SEC on April 30, 1999.
Incorporated herein by reference to Exhibit 4.1 of Oriental’s registration statement on Form 8-A filed with the SEC on September 26, 2003.
Incorporated herein by reference to Exhibit 3.1 of Oriental’s current report on Form 8-K filed with the SEC on November 8, 2012.
(8)
Incorporated herein by reference to Exhibit 4.2 of Oriental’s registration statement on Form S-3 filed with the SEC on April 2, 1999.
Incorporated herein by reference to Exhibit 4.2 of Oriental’s registration statement on Form S-3, as amended, filed with the SEC on September 23, 2003.
(9)
(10) Incorporated herein by reference to Exhibit 10.12 of Oriental’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(11) Incorporated herein by reference to Exhibit 10.14 of Oriental’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(12) Incorporated herein by reference to Exhibit 10.23 of Oriental’s annual report on Form 10-K filed with the SEC on March 28, 2007. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
(13) Incorporated herein by reference to Exhibit 4.1 of Oriental’s registration statement on Form S-8 filed with the SEC on October 7, 2013.
(14) Incorporated herein by reference to Exhibit 10.1 of Oriental’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(15) Incorporated herein by reference to Exhibit 10.2 of Oriental’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(16) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on May 8, 2015.
(17) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on November 2, 2018.
(18) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on May 4, 2018.
(19) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on August 3, 2018. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment.
(20) Incorporated herein by reference to Exhibit 10.1 of Oriental's current report on Form 8-K filed with the SEC on February 7, 2017.
209
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
SIGNATURES
By: /s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
By: /s/ Maritza Arizmendi Díaz
Maritza Arizmendi Díaz
Executive Vice President and Chief Financial Officer
By: /s/ Krisen Aguirre Torres
Krisen Aguirre Torres
Vice President Financial Reporting and Accounting Control
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the date indicated.
By: /s/ Julian Inclán
Julian Inclán
Chairman of the Board
By: /s/ José Rafael Fernández
José Rafael Fernández
Vice Chairman of the Board
By: /s/ Juan Carlos Aguayo
Juan Carlos Aguayo
Director
By: /s/ Jorge Colón Gerena
Jorge Colón Gerena
Director
By: /s/ Pedro Morazzani
Pedro Morazzani
Director
By: /s/ Edwin Pérez Hernández
Edwin Pérez Hernández
Director
By: /s/ Néstor de Jesús
Néstor de Jesús
Director
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
Dated: March 8, 2019
210
interior.indd 6
3/12/19 7:50 AM
BOARD OF DIRECTORS
Julian S. Inclán
Chair Board of Directors
Chair - Strategic Committee;
Member of all other Board Committees
José R. Fernández
President, CEO and Vice Chair of the Board;
Member - Strategic Committee
Nestor de Jesús
Chair - Board Risk and Compliance Committee;
Member - Corporate Governance and Nominating and
Strategic Committees
Juan C. Aguayo
Chair - Corporate Governance and Nominating Committee;
Member - Board Risk and Compliance Committee
Jorge Colón Gerena
Chair - Compensation Committee;
Member - Corporate Governance and Nominating, Audit
and Strategic Committees
Pedro Morazzani
Chair - Audit Committee
Edwin Pérez
Member - Compensation Committee
Carlos O. Souffront
Secretary
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EXECUTIVES & OFFICERS
Executive Team:
José Rafael Fernández
President, CEO and Vice Chairman of the Board
Ganesh Kumar
Senior Executive Vice President, Chief Operating Officer
Martiza Arizmendi
Executive Vice President, Chief Financial Officer
Carlos O. Souffront
Executive Vice President, General Counsel
Leadership Team:
Rafael Cruz
Senior Vice President and Chief Risk and Compliance Officer
Ada García
Senior Vice President, Retail Channel Business Development
Félix Silva
Senior Vice President, Retail Operations and Collections
Patrick Haggarty
Executive Vice President, Commercial Banking and Trust
César Ortiz
Senior Vice President, Commercial Credit and Operations
Ramón Rosado
Senior Vice President and Director US Loans Program
Jennifer Zapata Nazario
Senior Vice President, Human Resources
Carlos Viña
Senior Vice President, Oriental Insurance
Vanessa de Armas
Vice President, General Auditor
Sean Miles
Senior Vice President, Financial Services
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3/12/19 7:50 AM
GENERAL INFORMATION
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
April 24, 2019 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 2018, the Sarbanes-Oxley Act Section 302 Certifications
of both our CEO and CFO regarding the quality of our public
disclosures.
Business Lines
BANKING: Retail, Commercial and Wholesale
AUTO LENDING
MORTGAGE LENDING
WEALTH MANAGEMENT: Trust and Retirement Services,
Securities Brokerage, Investment Advisory Services
INSURANCE
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