UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 001-12647
OFG Bancorp
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0538893
Principal Executive Offices:
254 Muñoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone Number: (787) 771-6800
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock ($1.00 par value per share)
7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)
7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)
7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Ac.t
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the common stock held by non-affiliates of OFG Bancorp (the “Company”) was approximately $1.220 billion as of
June 30, 2019 based upon 51,330,031 shares outstanding and the reported closing price of $23.77 on the New York Stock Exchange on that date.
As of January 31, 2020, the Company had 51,398,956 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement relating to the 2020 annual meeting of shareholders are incorporated herein by reference in
response to Items 10 through 14 of Part III, except for certain information set forth herein under Item 12.
OFG Bancorp
FORM 10-K
For the Year Ended December 31, 2019
TABLE OF CONTENTS
PART I
Item 1.
Business ...................................................................................................................................................................
Item 1A. Risk Factors .............................................................................................................................................................
Item 1B. Unresolved Staff Comments ....................................................................................................................................
Item 2.
Properties .................................................................................................................................................................
Legal Proceedings ....................................................................................................................................................
Item 3.
Item 4. Mine Safety Disclosures ..........................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ......................................................................................................................................................
Item 6.
Selected Financial Data ...........................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................................................................
Item 8.
Financial Statements and Supplementary Data ........................................................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................
Item 9A. Controls and Procedures ..........................................................................................................................................
Item 9B. Other Information ....................................................................................................................................................
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................
Item 15. Exhibits and Financial Statement Schedules ...........................................................................................................
Item 16. Form 10-K Summary ..............................................................................................................................................
PART IV
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FORWARD-LOOKING STATEMENTS
The information included in this annual report on Form 10-K contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of
operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or “Oriental”), including, but not
limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of
interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new
accounting standards on Oriental’s financial condition and results of operations. All statements contained herein that are not clearly
historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project”
and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar
expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by
management that are difficult to predict. Various factors, some of which by their nature are beyond Oriental’s control, could cause
actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause
such a difference include, but are not limited to:
the rate of growth in the economy and employment levels, as well as general business and economic conditions;
•
• changes in interest rates, as well as the magnitude of such changes;
• a credit default by municipalities of the government of Puerto Rico;
• amendments to the fiscal plan approved by the Financial Oversight and Management Board for Puerto Rico;
• determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and
•
•
all of its agencies, including some of its public corporations;
the impact of property, credit and other losses in Puerto Rico as a result of hurricanes, earthquakes and other natural disasters;
the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical
infrastructure, which suffered catastrophic damages caused by hurricane Maria and recent earthquakes;
the pace and magnitude of Puerto Rico’s economic recovery;
the fiscal and monetary policies of the federal government and its agencies;
•
•
• changes in federal bank regulatory and supervisory policies, including required levels of capital;
•
the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico;
•
the performance of the stock and bond markets;
• competition in the financial services industry;
• possible legislative, tax or regulatory changes; and
• difficulties in integrating the acquired Puerto Rico operations of Scotiabank de Puerto Rico (“SBPR”) and certain branch assets
and liabilities of The Bank of Nova Scotia (“BNS”) in Puerto Rico and the U.S. Virgin Islands (the “Scotiabank PR & USVI
Acquisition”) into the Company’s operations.
Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-
looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the
job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets,
charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding
sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements
and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial
assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and
interpretations; increased competition; Oriental’s ability to grow its core businesses; decisions to downsize, sell or close units or
otherwise change Oriental’s business mix; and management’s ability to identify and manage these and other risks.
All forward-looking statements included in this annual report on Form 10-K are based upon information available to Oriental as of the
date of this report, and other than as required by law, including the requirements of applicable securities laws, Oriental assumes no
obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
ITEM 1. BUSINESS
General
Oriental is a publicly-owned financial holding company incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto
Rico, providing a full range of banking and financial services through its subsidiaries. Oriental is subject to the provisions of the
U.S. Bank Holding Company Act of 1956, as amended, (the “BHC Act”) and accordingly, subject to the supervision and regulation of
the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).
Oriental provides comprehensive banking and financial services to its clients through a complete range of banking and financial
solutions, including commercial, consumer, auto, and mortgage lending; checking and savings accounts; financial planning, insurance,
financial services, and investment brokerage; and corporate and individual trust and retirement services. Oriental operates through
three major business segments: Banking, Wealth Management, and Treasury, differentiating the Oriental brand through customer
segmentation and innovative solutions, primarily in Puerto Rico and United States Virgin Islands (“USVI”). Oriental provides these
services through various subsidiaries including, a commercial bank, Oriental Bank (the "Bank"), a securities broker-dealer, Oriental
Financial Services LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), a
retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and a commercial lender, OFG USA LLC ("OFG USA"),
which is a subsidiary of the Bank. OFG Ventures LLC (“OFG Ventures”), a limited liability corporation, is also a subsidiary of
Oriental. All our subsidiaries are based in San Juan, Puerto Rico and the USVI, except for OPC which is based in Boca Raton, Florida
OFG USA which is based in Cornelius, North Carolina. Oriental has 55 branches in Puerto Rico and 2 branches in USVI. Oriental’s
long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of
integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing
non-interest revenue from banking and financial services, and improving operating efficiencies.
Oriental’s strategy involves:
• Expanding its ability to attract deposits and build relationships with customers by refining service delivery and
providing innovative banking technologies for day-to-day customer transactions, and achieving sustainable levels of
differentiation in the market;
• Focusing on greater growth in commercial and consumer lending, trust and financial services, and insurance products;
•
•
Improving operating efficiencies, and continuing to maintain effective asset-liability management;
Implementing a broad ranging effort to instill in employees and make customers aware of Oriental’s determination to
effectively serve and advise its customer base in a responsive and professional manner; and
• Matching its portfolio of investment securities with the related funding to achieve favorable spreads, and primarily
investing in U.S. government-sponsored agency obligations.
Together with a highly experienced group of senior and mid-level executives and the benefits from the acquisitions of Eurobank
Puerto Rico, the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”) and the Puerto Rico and USVI
operations of The Bank of Nova Scotia (“BNS”), this strategy has resulted in sustained growth in Oriental’s deposit-taking activities,
commercial, consumer and mortgage lending and financial service activities, allowing Oriental to distinguish itself in a highly
competitive industry. Oriental is not immune from general and local financial and economic conditions. Past experience is not
necessarily indicative of future performance but given market uncertainties and on a reasonable time horizon of three to five years,
this strategy is expected to maintain its steady progress towards Oriental’s long-term goal.
Oriental’s principal funding sources are branch deposits, securities sold under agreements to repurchase, Federal Home Loan Bank
(“FHLB”) advances, wholesale deposits, and subordinated capital notes. Through its branch network, Oriental Bank offers personal
non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts (“IRAs”)
and commercial non-interest bearing checking accounts. The FDIC insures the Bank’s deposit accounts up to applicable limits.
Management makes retail deposit pricing decisions periodically, adjusting the rates paid on retail deposits in response to general
market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, the London
Interbank Offered Rate (“LIBOR”), and mainland U.S. market interest rates.
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Significant Transactions During 2019 – The Scotiabank PR & USVI Acquisition
On December 31, 2019, Oriental purchased from BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”) for an
aggregate purchase price of $550 million. Immediately following the closing of the Scotiabank PR & USVI Acquisition, Oriental
merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this
transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets
(including loans, ATMs and physical branch locations) and an assumption of certain liabilities (including deposits) for their net book
value plus a $10 million premium on deposits. In addition, Oriental acquired certain loans and assumed certain liabilities, from BNS’s
Puerto Rico branch for their net book value. As a result of the acquisition, Oriental added $2.2 billion net loans and $3 billion dollars
in core low-cost deposits with a bargain purchase gain of $315 thousand, included as “Bargain purchase from Scotiabank PR & USVI
acquisition” in the consolidated statement of operations. The audited consolidated financial statements contemplate the effect of the
Scotiabank PR & USVI Acquisition. Due to the acquisition closing occurring at year-end, Oriental’s consolidated statement of
operations reflect Oriental’s pre-acquisition operations, except for $24.1 million acquisition related expenses, while the Balance Sheet
reflects the newly acquired assets and liabilities.
Based on the closing of the Scotiabank PR & USVI Acquisition as of December 31, 2019, Oriental (a) acquired (at an estimated fair
value) $2.216 billion in loans, $576.2 million in investment securities, $8.3 million in foreclosed real estate, $492.5 million in cash
and cash equivalents, $9.9 million in premises and equipment, $54.8 million in a core deposit, customer relationship, and other
intangibles, $40.5 million servicing asset, $59.9 million deferred tax asset, and $103.9 million in other assets, and (b) assumed $3.025
billion in deposits and $105.7 million in other liabilities.
In preparation to the Scotiabank PR & USVI Acquisition, during 2019 Oriental sold $95.0 million non-performing loans increasing
the provision for loan and lease losses by $54.3 million; and sold $672 million available-for-sale securities at a gain of $8.3 million.
Segment Disclosure
Oriental has three reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable
segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as
Oriental’s organizational structure, nature of products, distribution channels and economic characteristics of the products were also
considered in the determination of the reportable segments. Oriental measures the performance of these reportable segments based on
pre-established annual goals involving different financial parameters such as net income, interest rate spread, loan production, and fees
generated.
For detailed information regarding the performance of Oriental’s operating segments, please refer to Note 31 in Oriental’s
accompanying consolidated financial statements.
Banking Activities
The Bank, Oriental’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan, Puerto
Rico. The Bank has 55 branches throughout Puerto Rico and 2 branches in USVI, and was incorporated in October 1964 as a federal
mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings
bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking law of
the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and
obtain more flexibility in its businesses. As an FDIC insured Puerto Rico-chartered commercial bank, it is subject to examination by
the FDIC and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking services
such as commercial, consumer, and mortgage lending, savings and time deposit products, financial planning, and corporate and
individual trust services, and capitalizes on its retail banking network to provide commercial and mortgage lending products to its
clients. The Bank has an operating subsidiary, OFG USA, which is organized in Delaware. It also has three international banking
entities (each an “IBE”) organized in Puerto Rico pursuant to the International Banking Center Regulatory Act of Puerto Rico, as
amended (the “IBE Act”), two are units operating within the Bank, named Oriental Overseas and Oriental International (the “IBE
Units”), and the other is a wholly-owned subsidiary of the Bank, named Oriental International Bank, Inc. (the “IBE Subsidiary”). The
IBE Unit and IBE Subsidiary offer the Bank certain Puerto Rico tax advantages, and their services are limited under Puerto Rico law
to persons and assets/liabilities located outside of Puerto Rico.
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Banking activities include the Bank’s branches and mortgage banking activities with traditional retail banking products such as
deposits, commercial loans, consumer loans and mortgage loans. The Bank’s lending activities are primarily with consumers located
in Puerto Rico. The Bank’s lending transactions include a diversified number of industries and activities, all of which are
encompassed within four main categories: commercial, consumer, mortgage and auto.
Oriental’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, the sale of loans directly into the secondary market or the securitization of
conforming loans into mortgage-backed securities, and the purchase or assumption of the right to service loans originated by others.
The Bank originates Federal Housing Administration (“FHA”) insured mortgages, Veterans Administration (“VA”) guaranteed
mortgages, and Rural Housing Service (“RHS”) guaranteed loans that are primarily securitized for issuance of Government National
Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the
secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under standard Federal National
Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as
conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an
approved seller of FNMA and FHLMC mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is
also an approved issuer of GNMA mortgage-backed securities. The servicing of the residential mortgage loan portfolio acquired in
2012 as part of its acquisition of the Puerto Rico operations of BBVA (the "BBVAPR Acquisition") is performed through a subservice
that owns the servicing rights to such loans. Oriental services the GNMA, FNMA, and FHLMC pools that it issues and the rest of its
residential mortgage loan portfolio.
Loan Underwriting
Auto loans: Oriental provides financing for the purchase of new or used motor vehicles. These loans are generated mainly through
dealers authorized and approved by the auto credit department committee of Oriental. The auto credit department has the specialized
structure and resources to provide the service required for this product according to market demands and trends. The auto loan credit
policy establishes specific guidance and parameters for the underwriting and origination processes. Underwriting procedures, lending
limits, interest rate approval, insurance coverage, and automobile brand restrictions are some parameters and internal controls
implemented to ensure the quality and profitability of the auto loan portfolio. The proprietary credit scoring system is a fundamental
part of the decision process.
Consumer loans: Consumer loans include personal loans, credit cards, lines of credit and other loans made by banks to individual
borrowers. All loan originations must be underwritten in accordance with Oriental’s underwriting criteria and include an assessment of
each borrower’s personal financial condition, including verification of income, assets, Fair Isaac Corporation ("FICO") score, and
credit reports. The proprietary credit scoring system is a fundamental part of the decision process.
Residential mortgage loans: All loan originations, regardless of whether originated through Oriental’s retail banking network or
purchased from third parties, must be underwritten in accordance with Oriental’s underwriting criteria, including loan-to-value ratios,
borrower income qualifications, debt ratios and credit history, investor requirements, and title insurance and property appraisal
requirements. Oriental’s mortgage underwriting standards comply with the relevant guidelines set forth by the Department of Housing
and Urban Development (“HUD”), VA, FNMA, FHLMC, federal and Puerto Rico banking regulatory authorities, as applicable.
Oriental’s underwriting personnel, while operating within Oriental’s loan offices, make underwriting decisions independent of
Oriental’s mortgage loan origination personnel.
Commercial loans: Commercial loans include lines of credit and term facilities to finance business operations and to provide working
capital for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower’s cash flow from
operations is generally the primary source of repayment, Oriental’s analysis of the credit risk focuses heavily on the borrower’s debt-
repayment capacity. Commercial term loans generally have terms from one to five years, may be collateralized by the asset being
acquired, real estate, or other available assets, and bear interest rates that float with the prime rate, LIBOR or another established
index, or are fixed for the term of the loan. Lines of credit are extended to businesses based on an analysis of the financial strength and
integrity of the borrowers and are generally secured primarily by real estate, accounts receivables or inventory, and have a maturity of
one year or less. Such lines of credit bear an interest rate that floats with a base rate, the prime rate, LIBOR, or another established
index.
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Sale of Loans and Securitization Activities
Oriental may engage in the sale or securitization of the residential mortgage loans that it originates. Oriental is an approved issuer of
GNMA-guaranteed mortgage-backed securities which involves the packaging of FHA loans, RHS loans and VA loans into pools.
Oriental can also act as issuer in the case of conforming conventional loans which involves grouping these types of loans into pools
and issuing FNMA or FHLMC mortgage-backed securities. The issuance of mortgage-backed securities provides Oriental with the
flexibility of either selling the security into the open market or retaining it on books. In the case of conforming conventional loans,
Oriental may also sell such loans through the FNMA and FHLMC cash window programs.
Wealth Management Activities
Wealth management activities are generated by such businesses as securities brokerage, trust services, retirement planning, insurance,
pension administration, and other financial services.
Oriental Financial Services is a Puerto Rico limited liability company and Oriental’s subsidiary engaged in securities brokerage
activities in accordance with Oriental’s strategy of providing fully integrated financial solutions, covering various investment
alternatives such as tax-advantaged fixed income securities, mutual funds, stocks, and bonds to retail and institutional clients. It also
offers separately-managed accounts and mutual fund asset allocation programs sponsored by unaffiliated professional asset managers.
These services are designed to meet each client’s specific needs and preferences, including transaction-based pricing and asset-based
fee pricing. It has managed and participated in public offerings and private placements of debt and equity securities in Puerto Rico and
has engaged in municipal securities business with the Commonwealth of Puerto Rico and its instrumentalities, municipalities, and
public corporations. Oriental Financial Services, a member of FINRA and the Securities Investor Protection Corporation, is a
registered securities broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. The broker-dealer does not carry
customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii)
of such rule. It clears securities transactions through Pershing LLC, a clearing agent that carries the accounts of its customers on a
“fully disclosed” basis.
Oriental Insurance is a Puerto Rico limited liability company and Oriental’s subsidiary engaged in insurance agency services. It
provides Oriental with cross-marketing opportunities under the legal framework established by the financial modernization legislation.
Oriental Insurance currently earns commissions by acting as a licensed insurance agent in connection with the issuance of insurance
policies by unaffiliated insurance companies and continues to cross market its services to Oriental’s existing customer base.
OPC, a Florida corporation, is Oriental’s subsidiary engaged in the administration of retirement plans in the U.S., Puerto Rico, and the
Caribbean.
Corporate and individual trust services are provided by the Bank’s trust division.
Treasury Activities
Treasury activities encompass all of Oriental’s treasury-related functions. Oriental’s investment portfolio consists of mortgage-backed
securities, obligations of U.S. government-sponsored agencies and money market instruments. Agency mortgage-backed securities,
the largest component of the investment portfolio, consist principally of pools of residential mortgage loans that are made to
consumers and then resold in the form of pass-through certificates in the secondary market, the payment of interest and principal of
which is guaranteed by GNMA, FNMA or FHLMC.
4
Market Area and Competition
The main geographic business and service area of Oriental is in Puerto Rico, where the banking market is highly competitive. Puerto
Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States of
America. Oriental also competes with brokerage firms with retail operations, credit unions, savings and loan cooperatives, small loan
companies, insurance agencies, and mortgage banks in Puerto Rico. Oriental encounters intense competition in attracting and retaining
deposits and in its consumer and commercial lending activities. Management believes that Oriental has been able to compete
effectively for deposits and loans by offering a variety of transactional account products and loans with competitive terms,
emphasizing the quality of its service, pricing its products at competitive interest rates, offering convenient branch locations, and
offering financial planning and financial services at most of its branch locations. Puerto Rico has experienced a significant
consolidation of commercial banks since 2010, which has created an environment for more rational loan and deposit pricing.
Oriental’s ability to originate loans depends primarily on the services that it provides to its borrowers, in making prompt credit
decisions, and on the rates and fees that it charges.
Oriental is also developing new commercial relationships in the United States, as it launched in late 2017 the U.S. commercial loan
program, generally consisting of purchases of loan participations in credit facilities to commercial borrowers in the U.S. mainland.
As part of the Scotiabank PR & USVI acquisition on December 31, 2019, Oriental began to operate in the United States Virgin Islands
with the intention to grow the business acquired in the USVI.
Regulation and Supervision
General
Oriental is a financial holding company subject to supervision and regulation by the Federal Reserve Board under the BHC Act, as
amended by the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”). The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding
company requires that a bank holding company and all of the subsidiary banks controlled by it at the time of election must be and
remain at all times “well capitalized” and “well managed.”
Oriental elected to be treated as a financial holding company as permitted by the Gramm-Leach-Bliley Act. Under that law, if Oriental
fails to meet the requirements for being a financial holding company and is unable to correct such deficiencies within certain
prescribed time periods, the Federal Reserve Board could require Oriental to divest control of its depository institution subsidiary or
alternatively cease conducting activities that are not permissible for bank holding companies that are not financial holding companies.
Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature or
incidental to such financial activity, or (ii) complementary to a financial activity provided it does not pose a substantial risk to the
safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides
that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities;
(b) insurance activities; (c) financial, investment or economic advisory services; (d) securitization of assets; (e) securities underwriting
and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and
(h) merchant banking activities. A financial holding company may generally commence any activity, or acquire any company, that is
financial in nature without prior approval of the Federal Reserve Board. As provided by the Dodd-Frank Act, a financial holding
company may not acquire a company, without prior Federal Reserve Board approval, in a transaction in which the total consolidated
assets to be acquired by the financial holding company exceed $10 billion.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand
the list of financial or incidental activities, but requires consultation with the U.S. Treasury Department and gives the Federal Reserve
Board authority to allow a financial holding company to engage in any activity that is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the financial system.
5
Oriental is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its own
business operations and those of its subsidiaries. In addition, Federal Reserve Board approval must also be obtained before a bank
holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding
company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their
non-bank subsidiaries.
The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the
OCFI and the FDIC. The Bank is subject to extensive regulation and examination by the OCFI and the FDIC and is subject to the
Federal Reserve Board’s regulation of transactions between the Bank and its affiliates. The Bank’s activities in USVI are also subject
to regulation and examination by the USVI Banking Board. The federal and Puerto Rico laws and regulations which are applicable to
the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the
availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of such
regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the
money supply and credit availability in order to control inflation in the economy.
Oriental’s mortgage banking business is subject to the rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA
with respect to the origination, processing, servicing and selling of mortgage loans and the sale of mortgage-backed securities. Those
rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for
inspections and appraisal reports, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to
VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act,
the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and
settlement costs. Oriental is also subject to regulation by the OCFI with respect to, among other things, licensing requirements and
maximum origination fees on certain types of mortgage loan products.
Oriental and its subsidiaries are subject to the rules and regulations of certain other regulatory agencies. Oriental Financial Services, as
a registered broker-dealer, is subject to the supervision, examination and regulation of FINRA, the SEC, and the OCFI in matters
relating to the conduct of its securities business, including record keeping and reporting requirements, supervision and licensing of
employees, and obligations to customers.
Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto
Rico in matters relating to insurance sales, including but not limited to, licensing of employees, sales practices, charging of
commissions and reporting requirements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act implemented a variety of far-reaching changes and has been described as the most sweeping reform of the
financial services industry since the 1930’s. It has a broad impact on the financial services industry, including significant regulatory
and compliance changes, such as: (i) enhanced resolution authority of troubled and failing banks and their holding companies;
(ii) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower;
(iii) increased capital and liquidity requirements; (iv) increased regulatory examination fees; (v) changes to assessments to be paid to
the FDIC for federal deposit insurance; (vi) prohibiting bank holding companies, such as Oriental, from including in regulatory Tier 1
capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (vii) numerous other provisions
designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be
distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal
Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate
governance and executive compensation matters that affect most U.S. publicly traded companies, including Oriental. A few provisions
of the Dodd-Frank Act became effective immediately, while various provisions have become effective in stages. Many of the
requirements called for in the Dodd-Frank Act have been implemented over time and most are subject to implementing regulations.
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The Dodd-Frank Act also created a new consumer financial services regulator, the Bureau of Consumer Financial Protection (the
“CFPB”), which assumed most of the consumer financial services regulatory responsibilities previously exercised by federal banking
regulators and other agencies. The CFPB’s primary functions include the supervision of “covered persons” (broadly defined to include
any person offering or providing a consumer financial product or service and any affiliated service provider) for compliance with
federal consumer financial laws. It has primary authority to enforce the federal consumer financial laws, as well as exclusive authority
to require reports and conduct examinations for compliance with such laws, in the case of any insured depository institution with total
assets of more than $10 billion and any affiliate thereof. The CFPB also has broad powers to prescribe rules applicable to a covered
person or service provider in connection with any transaction with a consumer for a consumer financial product or service, or the
offering of a consumer financial product or service.
Holding Company Structure
The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including Oriental), whether in the
form of loans, other extensions of credit, investments or asset purchases, among others. Such transfers are limited to 10% of the
transferring institution’s capital stock and surplus with respect to any affiliate (including Oriental), and, with respect to all affiliates, to
an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specified amounts, carried out on an arm’s length basis, and consistent with safe and sound banking
practices.
Under the Dodd-Frank Act, a bank holding company, such as Oriental, must serve as a source of financial strength for any subsidiary
depository institution. The term “source of financial strength” is defined as the ability of a company to provide financial assistance to
its insured depository institution subsidiaries in the event of financial distress at such subsidiaries. This support may be required at
times when, absent such requirement, the bank holding company might not otherwise provide such support. In the event of a bank
holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital
of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans
by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of Oriental.
Since Oriental is a financial holding company, its right to participate in the assets of any subsidiary upon the latter’s liquidation or
reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of the Bank) except to
the extent that Oriental is a creditor with recognized claims against the subsidiary.
Dividend Restrictions
The principal source of funds for Oriental is the dividends from the Bank. The ability of the Bank to pay dividends on its common
stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the “Banking Act”), the Federal Deposit Insurance Act, as
amended (the “FDIA”), and the FDIC regulations. In general terms, the Banking Act provides that when the expenditures of a bank
are greater than its receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and
the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such
balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Banking Act provides that
until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare
any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is
undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a
bank.
The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of
adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to
engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the
payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such
practice. The Federal Reserve Board has a policy statement that provides that an insured bank or bank holding company should not
maintain its existing rate of cash dividends on common stock unless (i) the organization’s net income available to common
shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention
appears consistent with the organization’s capital needs, asset quality, and overall financial condition. In addition, all insured
depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement
Act of 1991 (“FDICIA”).
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Federal Home Loan Bank System
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing
Finance Agency. The FHLB serves as a credit facility for member institutions within their assigned regions. They are funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in
accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.
As a system member, the Bank is entitled to borrow from the FHLB of New York (the “FHLB-NY”) and is required to invest in
FHLB membership and activity-based stock. The Bank must purchase membership stock equal to the greater of $1,000 or 0.15% of
certain mortgage-related assets held by the Bank. The Bank is also required to purchase activity-based stock equal to 4.50% of
outstanding advances to the Bank by the FHLB. The Bank is in compliance with the membership and activity-based stock ownership
requirements described above. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a
portion of the Bank’s mortgage loan portfolio, certain other investments, and the capital stock of the FHLB held by the Bank. The
Bank is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding
advances.
Prompt Corrective Action Regulations
Pursuant to the Dodd-Frank Act, federal banking agencies adopted capital rules based on the framework of the Basel Committee on
Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”),
which became effective January 1, 2014 for advanced approaches banking organizations (i.e., those with consolidated assets greater
than $250 billion or consolidated on-balance sheet foreign exposures of at least $10 billion) and January 1, 2015 for all other covered
organizations replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules.
The Basel III capital rules provide certain changes to the prompt corrective action regulations adopted by the agencies under Section
38 of the FDIA, as amended by FDICIA. These regulations are designed to place restrictions on U.S. insured depository institutions if
their capital levels begin to show signs of weakness. The five capital categories established by the agencies under their prompt
corrective action framework are: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized”.
The Basel III capital rules expand such categories by introducing a common equity tier 1 capital requirement for all depository
institutions, revising the minimum risk-based capital ratios and, beginning in 2018, the proposed supplementary leverage requirement
for advanced approaches banking organizations. The common equity tier 1 capital ratio is a new minimum requirement designed to
ensure that banking organizations hold sufficient high-quality regulatory capital that is available to absorb losses on a going-concern
basis. Under such rules, an insured depository institution is:
(i) “well capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier 1 risk-based capital ratio of 8% or more, a common
equity tier 1 capital ratio of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is not subject to any written capital
order or directive;
(ii) “adequately capitalized,” if it has a total risk-based capital ratio of 8% or more, a tier 1 risk-based capital ratio of 6% or more, a
common equity tier 1 capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4% or more;
(iii) “undercapitalized,” if it has a total risk-based capital ratio that is less than 8%, a tier 1 risk-based ratio that is less than 6%, a
common equity tier 1 capital ratio that is less than 4.5%, or a tier 1 leverage capital ratio that is less than 4%;
(iv) “significantly undercapitalized,” if it has a total risk-based capital ratio that is less than 6%, a tier 1 risk-based capital ratio that is
less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1 leverage capital ratio that is less than 3%; and
(v) “critically undercapitalized,” if it has a ratio of tangible equity (defined as tier 1 capital plus non-tier 1 perpetual preferred stock) to
total assets that is equal to or less than 2%.
The new capital rules also include a policy statement by the agencies that all banking organizations should maintain capital
commensurate with their risk profiles, which may entail holding capital significantly above the minimum requirements. They also
provide a reservation of authority permitting examiners to require that such organizations hold additional regulatory capital.
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FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying
any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s
holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the
time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal
banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”)
merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund,
and increased the maximum amount of the insurance coverage for certain retirement accounts, and possible “inflation adjustments” in
the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment
credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund. As a result of the merger of the BIF and
the SAIF, all insured institutions are subject to the same assessment rate schedule.
The Dodd-Frank Act contains several important deposit insurance reforms, including the following: (i) the maximum deposit
insurance amount was permanently increased to $250,000; (ii) the deposit insurance assessment is now based on the insured
depository institution’s average consolidated assets minus its average tangible equity, rather than on its deposit base; (iii) the
minimum reserve ratio for the Deposit Insurance Fund was raised from 1.15% to 1.35% of estimated insured deposits by
September 30, 2020; (iv) the FDIC is required to “offset the effect” of increased assessments on insured depository institutions with
total consolidated assets of less than $10 billion; (v) the FDIC is no longer required to pay dividends if the Deposit Insurance Fund’s
reserve ratio is greater than the minimum ratio; and (vi) the FDIC temporarily insured the full amount of qualifying “noninterest-
bearing transaction accounts” until December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing transaction
account” is a deposit or account maintained at a depository institution with respect to which interest is neither accrued nor paid, on
which the depositor or account holder is permitted to make withdrawals by negotiable or transferrable instrument, payment orders of
withdrawals, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to
third parties or others, and on which the insured depository institution does not reserve the right to require advance notice of an
intended withdrawal.
The FDIC amended its regulations under the FDIA, as amended by the Dodd-Frank Act, to modify the definition of a depository
institution’s insurance assessment base; to revise the deposit insurance assessment rate schedules in light of the new assessment base
and altered adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to revise the large insured depository
institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the
FDIC may incur. Since the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the new
assessment rates adopted by the FDIC are lower than the former rates.
In 2016, the FDIC adopted two new rules to require large institutions to bear the burden of raising the reserve ratio from 1.15% to
1.35% and amended the pricing for small institutions after the reserve ratio reaches 1.15%. Once the reserve ratio reaches 1.38%,
small institutions will receive credits to offset their contribution to raising the reserve ratio above 1.35%. Effective June 30, 2016, the
reserve ratio reached 1.15%, and assessment collections decreased for small institutions like the Bank. Furthermore, on September 30,
2018, the reserve ratio reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30,
2020 deadline required under the Dodd-Frank Act, and small institutions like the Bank were awarded assessment credits for the
portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, which will be applied when the
reserve ratio is at least 1.38%.
Brokered Deposits
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FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well capitalized institutions are not
subject to limitations on brokered deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered
deposits only with a waiver from the FDIC and subject to certain restrictions on the interest paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits. As of December 31, 2019, the Bank is a well capitalized institution and is
therefore not subject to these limitations on brokered deposits.
However, under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which amended the FDIA,
reciprocal deposits are excluded from such limitations if the total reciprocal deposits of the institution do not exceed 20% of its total
liabilities. Reciprocal deposits are deposits that banks make with each other in equal amounts.
Regulatory Capital Requirements
Under the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital
requirements, on a consolidated basis, for insured institutions, depository institution holding companies, and non-bank financial
companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined
based on the minimum ratios established for insured depository institutions under prompt corrective action regulations. In effect, such
provision of the Dodd-Frank Act, which is commonly known as the Collins Amendment, applies to bank holding companies the same
leverage and risk-based capital requirements that apply to insured depository institutions. Because the capital requirements must be the
same for insured depository institutions and their holding companies, the Collins Amendment generally excludes certain debt or equity
instruments, such as cumulative perpetual preferred stock and trust preferred securities, from Tier 1 Capital. However, such
instruments issued before May 19, 2010 by a bank holding company, such as Oriental, with total consolidated assets of less than $15
billion as of December 31, 2009, are not affected by the Collins Amendments, are “grandfathered” under the new capital rules, and
may continue to be included in tier 1 Capital as a restricted core capital element.
The Basel III capital rules adopted by the federal banking agencies revise the agencies’ risk-based and leverage capital requirements
for banking organizations and consolidate three separate notices of proposed rulemaking that the OCC, Federal Reserve Board and
FDIC published in the Federal Register on August 30, 2012, with selected changes. In particular, and consistent with the Basel III
framework, the capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common
equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that apply to all banking organizations. The rules also raise
the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking
organizations. In addition, for the largest, most internationally active banking organizations, the rules include a new minimum
supplementary leverage ratio that takes into account off-balance sheet exposures. The rules incorporate these new requirements into
the agencies’ prompt corrective action framework. In addition, the rules establish limits on a banking organization’s capital
distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity
tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. Further, the rules amend the
methodologies for determining risk-weighted assets for all banking organizations; introduce disclosure requirements that would apply
to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets; and adopt changes to the
agencies’ regulatory capital requirements that meet the requirements of Section 171 and Section 939A of the Dodd-Frank Act. These
rules also codify the agencies’ capital rules, which have previously resided in various appendices to their respective regulations, into a
harmonized integrated regulatory framework.
Under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, federal banking agencies must develop a
Community Bank Leverage Ratio (i.e., the ratio of a bank’s equity capital to its average total consolidated assets) for banks with assets
of less than $10 billion. Such banks that exceed this ratio will generally be deemed to in compliance with all other capital and
leverage requirements. On November 21, 2018, the federal banking agencies issued a proposal to simplify regulatory capital
requirements for qualifying community banking organizations, as required by this law.
Failure to meet the capital rules could subject an institution to a variety of enforcement actions including the termination of deposit
insurance by the FDIC and to certain restrictions on its business. At December 31, 2019, Oriental was in compliance with all
applicable capital requirements. For more information, please refer to the accompanying consolidated financial statements.
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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.
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Transactions with Affiliates and Related Parties
Transactions between the Bank and any of its affiliates are governed by sections 23A and 23B of the Federal Reserve Act. These
sections are important statutory provisions designed to protect a depository institution from transferring to its affiliates the subsidy
arising from the institution’s access to the Federal safety net. An affiliate of a bank is any company or entity that controls, is controlled
by, or is under common control with the bank, including investment funds for which the bank or any of its affiliates is an investment
advisor. Generally, sections 23A and 23B (i) limit the extent to which a bank or its subsidiaries may engage in “covered transactions”
with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms that are consistent
with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in
securities issued by the affiliate, purchase of assets, acceptance of securities issued by the affiliate as collateral for a loan or extension
of credit, issuance of guarantees and other similar types of transactions. The Dodd-Frank Act expanded the scope of transactions
treated as “covered transactions” to include credit exposure to an affiliate on derivatives transactions, credit exposure resulting from a
securities borrowing or lending transaction, or derivative transaction, and acceptances of affiliate-issued debt obligations as collateral
for a loan or extension of credit. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from
100% to 130% of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an
affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as
favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Regulation W of the
Federal Reserve Board comprehensively implements sections 23A and 23B. The regulation unified and updated staff interpretations
issued over the years prior to its adoption, incorporated several interpretative proposals (such as to clarify when transactions with an
unrelated third party will be attributed to an affiliate), and addressed issues arising as a result of the expanded scope of non-banking
activities engaged in by banks and bank holding companies and authorized for financial holding companies under the Gramm-Leach-
Bliley Act.
Sections 22(g) and 22(h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal
shareholders. Regulation O of the Federal Reserve Board implements these provisions. Under Section 22(h) and Regulation O, loans
to a director, an executive officer and a greater-than-10% shareholder of a bank and certain of their related interests (collectively
“insiders”), and insiders of its affiliates, may not exceed, together with all other outstanding loans to such person and its related
interests, the bank’s single borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h)
and Regulation O also require that loans to insiders and insiders of affiliates be made on terms substantially the same as offered in
comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely
available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) and
Regulation O also require prior board of directors’ approval for certain loans, and the aggregate amount of extensions of credit by a
bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) and Regulation O place
additional restrictions on loans to executive officers.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with
its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess
the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings.
USA Patriot Act
Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, all financial institutions, including Oriental, Oriental Financial Services, and the Bank, are required in general to identify
their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain
transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their
customers and their transactions.
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The U.S. Treasury Department (the “US Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply
certain of its requirements to financial institutions. The regulations impose obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal consequences for the
institution. Oriental and its subsidiaries, including the Bank, have adopted policies, procedures and controls to address compliance
with the USA Patriot Act under existing regulations, and will continue to revise and update their policies, procedures and controls to
reflect changes required by the USA Patriot Act and the US Treasury’s regulations.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic
customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data
from unauthorized access. Oriental and its subsidiaries have established policies and procedures to assure Oriental’s compliance with
all privacy provisions of the Gramm-Leach-Bliley Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a range of corporate governance and accounting measures to increase
corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and
to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. In addition, SOX established
membership requirements and responsibilities for the audit committee, imposed restrictions on the relationship between Oriental and
external auditors, imposed additional responsibilities for the external financial statements on the chief executive officer and the chief
financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate its disclosure controls
and procedures and its internal control over financial reporting, and required the auditors to issue a report on the internal control over
financial reporting.
Oriental has included in this annual report on Form 10-K management’s assessment regarding the effectiveness of Oriental’s internal
control over financial reporting. The internal control report includes a statement of management’s responsibility for establishing and
maintaining adequate internal control over financial reporting for Oriental; management’s assessment as to the effectiveness of
Oriental’s internal control over financial reporting based on management’s evaluation as of year-end; and the framework used by
management as criteria for evaluating the effectiveness of Oriental’s internal control over financial reporting. As of December 31,
2019 Oriental’s management concluded that its internal control over financial reporting was effective.
As allowed by SEC guidance, management excluded from its assessment of the effectiveness of Oriental’s internal control over
financial reporting as of December 31, 2019, the Scotiabank PR & USVI Acquisition, which included total assets of $3.562 billion,
total liabilities of $3.513 billion in Oriental’s consolidated financial statements as of December 31, 2019.
Puerto Rico Banking Act
As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the OCFI under the Banking Act,
which contains provisions governing the organization of the Bank, rights and responsibilities of directors, officers and stockholders, as
well as the corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank and its affairs. In
addition, the OCFI is given extensive rulemaking power and administrative discretion under the Banking Act. The OCFI generally
examines the Bank at least once every year.
The Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such
fund (legal surplus) equals the total paid-in capital on common and preferred stock. At December 31, 2019 and 2018, legal surplus
amounted to $95.8 million and $90.2 million, respectively. The amount transferred to the legal surplus account is not available for the
payment of dividends to shareholders.
The Banking Act also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the
latter must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the reserve fund.
If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the
capital account and no dividend may be declared until said capital has been restored to its original amount and the reserve fund to 20%
of the original capital.
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The Banking Act further requires every bank to maintain a legal reserve which cannot be less than 20% of its demand liabilities,
except government deposits (federal, commonwealth and municipal), which are secured by actual collateral.
The Banking Act also requires change of control filings. When any person or entity will own, directly or indirectly, upon
consummation of a transfer, 5% or more of the outstanding voting capital stock of a bank, the acquiring parties must inform the OCFI
of the details not less than 60 days prior to the date said transfer is to be consummated. The transfer will require the approval of the
OCFI if it results in a change of control of the bank. Under the Banking Act, a change of control is presumed if an acquirer who did
not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer.
The Banking Act permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an
aggregate amount of 15% of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained
earnings, subject to certain limitations; and (iv) any other components that the OCFI may determine from time to time. If such loans
are secured by collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount will include 33.33% of
50% of the bank’s retained earnings. Such restrictions under the Banking Act on the amount of loans to a single borrower do not apply
to loans: (i) to the government of the United States or the government of the Commonwealth of Puerto Rico, or any of their respective
agencies, instrumentalities or municipalities, or (ii) that are wholly secured by bonds, securities and other evidence of indebtedness of
the government of the United States or of the Commonwealth of Puerto Rico or by bonds, not in default, of municipalities or
instrumentalities of the Commonwealth of Puerto Rico.
The Puerto Rico Finance Board is composed of the Commissioner of Financial Institutions of Puerto Rico; the Executive Director of
the Puerto Rico Fiscal Agency and Finance Advisory Authority: the Presidents of the Economic Development Bank for Puerto Rico
and the Puerto Rico Planning Board; the Secretaries of Commerce and Economic Development, Treasury and Consumer Affairs of
Puerto Rico; the Commissioner of Insurance of Puerto Rico; and the President of the Public Corporation for Insurance and
Supervision of Puerto Rico Cooperatives. It has the authority to regulate the maximum interest rates and finance charges that may be
charged on loans to individuals and businesses in the Commonwealth. The current regulations of the Puerto Rico Finance Board
provide that the applicable interest rate on loans to individuals and businesses is to be determined by free competition. The Puerto
Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card
purchases. There is presently no maximum rate for retail installment sales contracts and for credit card purchases.
Puerto Rico Internal Revenue Code
Under the Puerto Rico Internal Revenue Code of 2011, as amended (the "PR Code”), a corporation pays taxes at a fixed rate of 18.5%
(the regular corporate tax) plus a surtax that ranges from 5% for net income subject to surtax not greater than $75,000 to 19% for net
income subject to surtax in excess of $275,000. Net income subject to surtax is net income less $25,000. The maximum regular
corporate tax decreased to 18.5% for tax years beginning after December 31, 2018. The result is a maximum combined rate of 37.5%
under the PR Code for years beginning after December 31, 2018 (previously the maximum combined tax rate was 39%). The Bank
and other subsidiaries of Oriental are treated as separate taxable corporations and are not entitled to file consolidated returns.
Corporate income tax returns of “large taxpayers” are required to be certified as prepared or reviewed by a Puerto Rico licensed
certified public accountant. The PR Code also provides a dividends-received deduction of 100% on dividends received from
"controlled subsidiaries" subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
Net operating losses (“NOLs”) are allowed as a deduction in computing the net income of the taxpayer. The carryover period for
NOLs is currently 10 years. Moreover, the amount to be carried over to a particular year is limited to the excess of the NOL over 90%
of the net income for the year (for taxable years beginning after December 31, 2018).
On July 1, 2019, the Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60-2019 (the “Incentives
Code”). In general, the Incentives Code compiled into a single code many of the Puerto Rico tax incentives laws used to promote the
island’s economic development, with some modifications. The Incentives Code also amended various provisions of the PR Code,
mostly effective July 1, 2019. For example, the Incentives Code amended the PR Code: (i) to incorporate a new provision exempting
the payments for services between members of a controlled group of corporations or group of related entities doing business in Puerto
Rico from the 10% income tax withholding generally applicable on payments for services rendered, and (ii) to eliminate for taxable
years commencing after December 31, 2018 the limitation on NOL carryforwards following a change of ownership.
International Banking Center Regulatory Act of Puerto Rico
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The business and operations of the Bank’s IBE Units and IBE Subsidiary are subject to supervision and regulation by the OCFI. Under
the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an
IBE may be initiated without the prior approval of the OCFI if by such transaction a person would acquire, directly or indirectly,
control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued
thereunder by the OCFI (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are
generally limited to persons and assets/liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must
have not less than $300 thousand of unencumbered assets or acceptable financial guarantees in Puerto Rico.
Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBE Units and IBE Subsidiary have to maintain in Puerto Rico the books
and records of all their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of
their financial condition and results of operations to the OCFI, including annual audited financial statements.
The IBE Act empowers the OCFI to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things,
the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the OCFI finds that the business or
affairs of the IBE are conducted in a manner that is not consistent with the public interest.
In 2012, the IBE Act was superseded by a new law that, among other things, prohibits new license applications to organize and
operate an IBE. Any such newly organized entity (now called an “international financial entity”) must be licensed under the new law,
and such entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Units and IBE Subsidiary, which
are “grandfathered”) will generally be subject to a 4% Puerto Rico income tax rate.
Volcker Rule
The so-called “Volcker Rule” adopted by the federal banking regulatory agencies under Section 619 of the Dodd-Frank Act generally
prohibits bank holding companies, insured depository institutions and their affiliates from (i) engaging in short-term proprietary
trading of securities, derivatives, commodities futures and options on these instruments for their own account; and (ii) owning,
sponsoring or having certain relationships with hedge funds or private equity funds. However, it exempts certain activities, including
market making, underwriting, hedging, trading in government and municipal obligations, and organizing and offering a hedge fund or
private equity fund, among others. A banking entity that engages in any such covered activity (i.e., proprietary trading or investment
activities in hedge funds or private equity funds) is generally required to establish an internal compliance program reasonably
designed to ensure and monitor compliance with the Volcker Rule.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 amended the BHC Act to exempt from the Volcker
Rule those bank holding companies, insured depository institutions and their affiliates with total assets that do not exceed $10 billion
and trading assets and liabilities comprising not more than 5% of their total assets. Therefore, banking entities that meet such
threshold may generally engage in proprietary trading and invest in private equity and hedge funds. On December 21, 2018, the
federal banking agencies proposed rules to implement such exemption.
Employees
At December 31, 2019, Oriental had 2,431 employees. None of its employees is represented by a collective bargaining group. Oriental
considers its employee relations to be good.
Internet Access to Reports
Oriental’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any and all amendments to
such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge
on or through the “SEC filings” link of Oriental’s internet website at www.ofgbancorp.com, as soon as reasonably practicable after
Oriental electronically files such material with, or furnishes it to, the SEC.
Oriental’s corporate governance principles and guidelines, code of business conduct and ethics, and the charters of its audit
committee, compensation committee, risk and compliance committee, and corporate governance and nominating committee are
available free of charge on Oriental’s website at www.ofgbancorp.com under the corporate governance link. Oriental’s code of
business conduct and ethics applies to its directors, officers, employees and agents, including its principal executive, financial and
accounting officers.
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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 and recent earthquakes, have adversely impacted and may continue to adversely
impact us.
Our business is directly affected by economic conditions within Puerto Rico. A significant portion of our credit risk exposure on our
loan portfolio is concentrated in Puerto Rico. Such, our profitability and financial condition may be adversely affected by an extended
economic recession, adverse political, fiscal or economic developments in Puerto Rico, or the effects of natural disasters, all of which
could result in a reduction in loan originations, an increase in credit losses and a reduction in the value of our loans and loan servicing
portfolio.
In the past decades, Puerto Rico has experienced a significant economic contraction that began in 2007; a government fiscal crisis that
led to the appointment of a federal oversight board in 2016 and a bankruptcy type restructuring process of the government’s finances;
and various significant natural disasters, hurricanes Irma and Maria in September 2017 and a series of earthquakes primarily affecting
the southwest region of the island in January 2020. Although federal assistance for recovering from the natural disasters and
insurance recoveries are expected to drive economic growth in the short term, there is no guarantee that funds set aside for these
purposes will not be repurposed by the federal government or that their disbursement will not be unreasonably conditioned or delayed.
In addition, there is no assurance that the government will be able to satisfy its obligations as they may be restructured. Puerto Rico
also continues to be vulnerable to hurricanes and earthquakes and may be impacted by future natural disasters and other disasters such
as a pandemic. Furthermore, the government fiscal crisis may limit the ability of the Puerto Rico government to respond effectively to
future disasters.
Deterioration in local economic conditions or in the financial condition of an industry on which the local market depends could
adversely affect factors such as unemployment rates and real estate vacancy and values. This could result in, among other things, a
reduction of creditworthy borrowers seeking loans, an increase in loan delinquencies, defaults and foreclosures, an increase in
classified and non-accrual loans, a decrease in the value of collateral for loans, and a decrease in core deposits. Any of these factors
could materially impact our business.
For a discussion of the impact of the economy on our loan portfolios, see “—A continuing decline in the real estate market would
likely result in an increase in delinquencies, defaults and foreclosures and in a reduction in loan origination activity, which would
adversely affect our financial results.”
Puerto Rico and the USVI are susceptible to earthquakes, hurricanes and major storms, which could further deteriorate their
economy and infrastructure.
Our branch network and business is concentrated in Puerto Rico and the USVI, which are susceptible to earthquakes, hurricanes and
major storms that affect the local economy and the demand for our loans and financial services, as well as the ability of our customers
to repay their loans. Any such natural disasters may further adversely affect Puerto Rico’s and the USVI’s critical infrastructure,
which are generally weak. This makes us vulnerable to downturns in Puerto Rico’s and the USVI’s economy as a result of natural
disasters, such as recent earthquakes in 2020 and hurricanes Irma and Maria. Any subsequent earthquakes, hurricanes, major storms or
other disasters, such as pandemics, could further deteriorate Puerto Rico’s and USVI’s economy and infrastructure and negatively
affect or disrupt our operations and customer base.
Changes in interest rates could reduce Oriental’s net interest income
Market risk refers to the probability of variations in the net interest income or the fair value of assets and liabilities due to changes in
interest rates, currency exchange rates or equity prices.
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Changes in interest rates are one of the principal market risks affecting us. Our earnings are dependent to a large degree on net interest
income, which is the difference between the interest rates earned on interest-earning assets, such as loans and investment securities,
and the interest rates paid on interest-bearing liabilities, such as deposits and borrowings. Depending on the duration and repricing
characteristics of the assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level
of net interest income. For any given period, the pricing structure of the assets and liabilities is matched when an equal amount of such
assets and liabilities mature or reprice in that period. Like all financial institutions, our financial position is affected by fluctuations in
interest rates. Volatility in interest rates can also result in the flow of funds away from financial institutions. We may suffer losses or
experience lower spreads than anticipated if we are not effective in managing our interest rate risk.
CREDIT RISK
We are exposed to credit risk in connection with our loans to certain government agencies and municipalities of Puerto Rico, and
the restructuring of the government could adversely affect the value of such loans.
At December 31, 2019, we had approximately $134.0 million of direct credit exposure to four municipalities and a Puerto Rico public
corporation. Mainly, the credit exposure consists of collateralized loans or obligations that have special additional property tax
revenues pledged for their repayment.
The Puerto Rico government faces a number of severe economic and fiscal challenges that are expected to require a significant
government restructuring, as well as severe austerity measures to close its significant budget deficit.
If the government restructuring affects the ability of the municipalities to pay their obligations to us as they become due, or under
certain other circumstances, we may be required to adversely classify such loans and increase the provision for loan losses in
connection therewith. Such provision may significantly impact our earnings.
Heightened credit risk could require us to increase our provision for credit losses, which could have a material adverse effect on
our results of operations and financial condition.
Making loans is an essential element of our business, and there is a risk that the loans will not be repaid. This default risk is affected
by a number of factors, including:
•
•
•
•
the duration of the loan;
credit risks of a particular borrower;
changes in economic or industry conditions; and
in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.
Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might
be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially
adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment
of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an
evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may
not be enough to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the
allowance would materially decrease our net income.
Our emphasis on the origination of business and retail loans is one of the more significant factors in evaluating our allowance for loan
losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and
as a result would decrease our earnings.
We strive to maintain an appropriate allowance for loan and lease losses to provide for probable losses inherent in the loan portfolio.
We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal
loan grades, expected future cash collections, loss recovery rates and general economic factors, among others. Our methodology for
measuring the adequacy of the allowance relies on several key elements, which include a specific allowance for identified problem
loans and a general systematic allowance.
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We believe our allowance for loan and lease losses is currently sufficient given the constant monitoring of the risk inherent in the loan
portfolio. However, there is no precise method of predicting loan losses and therefore we always face the risk that charge-offs in
future periods will exceed the allowance for loan and lease losses and that additional increases in the allowance for loan and lease
losses will be required. In addition, the FDIC as well as the OCFI may require us to establish additional reserves. Additions to the
allowance for loan and lease losses would result in a decrease of net earnings and capital and could hinder our ability to pay dividends.
Given the economic conditions in Puerto Rico, we may continue to experience increased credit costs or need to take greater than
anticipated markdowns and make greater than anticipated provisions to increase the allowances for loan losses that could adversely
affect our financial condition and results of operations in the future.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan
charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a
materially adverse effect on our results of operations and/or financial condition.
We are subject to default and other risks in connection with mortgage loan originations.
From the time that we fund the mortgage loans originated to the time that they are sold, we are generally at risk for any mortgage loan
defaults. Once we sell the mortgage loans, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or
insurer of the mortgage loans. However, in the ordinary course of business, we make representations and warranties to the purchasers
and insurers of mortgage loans relating to the validity of such loans. If there is a breach of any of these representations or warranties,
we may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. We also may be required to
repurchase mortgage loans in the event that there was improper underwriting or fraud or in the event that the loans become delinquent
shortly after they are originated. Any such repurchases in the future may negatively impact our liquidity and operating results.
Termination of our ability to sell mortgage products to U.S government-sponsored entities would have a material adverse effect on our
results of operations and financial condition. In addition, we may be required to indemnify certain purchasers and others against losses
they incur in the event of breaches of our representations and warranties and in various other circumstances, including securities fraud
claims, and the amount of such losses could exceed the purchase amount of the related loans. Consequently, we may be exposed to
credit risk associated with sold loans. In addition, we incur higher liquidity risk with respect to mortgage loans not eligible to be
purchased or insured by FNMA, GNMA or FHLMC, due to a lack of secondary market in which to sell these loans. For the year
ended December 31, 2019, we repurchased $12.0 million of loans from GNMA and FNMA
We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable and
reasonably estimable related to the mortgage loans sold by us. The adequacy of the reserve and the ultimate amount of losses incurred
will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and
indemnification requests, the actual success rate of claimants, developments in litigation related to us and the industry, actual
recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). Due to uncertainties
relating to these factors, there can be no assurance that our reserves will be adequate or that the total amount of losses incurred will not
have a material adverse effect upon our financial condition or results of operations. For additional information related to our allowance
for loan and lease losses, see “Note 7—Allowance for Loan and Lease Losses” to our consolidated financial statements included in
this annual report on Form 10-K.
A continuing decline in the real estate market would likely result in an increase in delinquencies, defaults and foreclosures and in
a reduction in loan origination activity, which would adversely affect our financial results.
The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability
followed by periods of lower volumes and industry-wide losses. The market for residential mortgage loan originations in Puerto Rico
is currently in decline, and this trend could also reduce the level of mortgage loans that we may originate in the future and may
adversely impact our business. During periods of rising interest rates, refinancing originations for many mortgage products tend to
decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential
mortgage loan origination business is impacted by home values. A significant trend of decreasing values in several housing segments
in Puerto Rico continues to be experienced. There is a risk that a reduction in housing values could negatively impact our loss levels
on the mortgage loan portfolio because the value of the homes underlying the loans is a primary source of repayment in the event of
foreclosure.
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The decline in Puerto Rico’s economy has had an adverse effect in the credit quality of our loan portfolios. Among other things,
during the ongoing recession, we have experienced an increase in the level of non-performing assets and loan loss provision, which
adversely affected our profitability. Although the delinquency rates and non-performing assets have decreased recently, they may
increase if the recession continues or worsens. If there is another decline in economic activity, additional increases in the allowance
for loan and lease losses could be necessary with further adverse effects on our profitability.
Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell loans, the price received on the
sale of such loans, and the value of the mortgage loan portfolio, all of which could have a negative impact on our results of operations
and financial condition. In addition, any material decline in real estate values would weaken our collateral loan-to-value ratios and
increase the possibility of loss if a borrower default. For a discussion of the impact of the Puerto Rico economy on our business
operations, see “Most of our business is conducted in Puerto Rico, which is experiencing a deep economic recession, a downturn in
the real estate market, and a government fiscal and liquidity crisis.”
We may not be able to realize the anticipated benefits of the Scotiabank Transaction.
Our future growth and profitability depend, in part, on the ability to successfully manage the combined operations. The success of the
Scotiabank PR & USVI Acquisition will depend on, among other things, our ability to assess the quality of assets acquired, to realize
anticipated cost savings and to integrate the acquired companies in a manner that permits growth opportunities and does not materially
disrupt our or the acquired business’s existing customer relationships or result in decreased revenue resulting from any loss of
customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the Scotiabank PR & USVI
Acquisition may not be realized fully or at all or may take longer to realize than expected.
Loans that we acquired in the Scotiabank Transaction may be subject to greater than anticipated impairment.
We have made fair value estimates of certain assets and liabilities in recording the Scotiabank PR & USVI Acquisition. Actual values
of these assets and liabilities could differ from our estimates, which could result in us not achieving the anticipated benefits of the
Scotiabank PR & USVI Acquisition. In addition, Scotiabank’s loan scoring system was different than ours, and as we continue to
evaluate their loan portfolio using our systems, we may have to make additional adjustments.
Given the economic conditions in Puerto Rico, we may continue to experience increased credit costs or need to take greater than
anticipated markdowns and make greater than anticipated provisions to increase the allowances for loan losses on the loans acquired
that could adversely affect our financial condition and results of operations in the future.
We may not be able to integrate Scotiabank’s PR & USVI business into our operations.
The successful integration of Scotiabank’s PR & USVI banking operations and our future growth and profitability depend in part on
our ability to successfully manage the combined operations. Integration of an acquired business can be complex and costly, sometimes
including combining relevant accounting and data processing systems and management controls and policies, as well as managing
relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management
attention and resources, which could adversely affect our operations or results. The loss of key employees in connection with this
acquisition could adversely affect our ability to successfully conduct the combined operations. There can be no assurance that any of
these executives will choose to continue working with us, or if they do, that we will be able to successfully integrate these executives
as part of our management team in the combined business.
The Scotiabank PR & USVI Acquisition may also result in business disruptions that cause us to lose customers or cause customers to
move their accounts or business to competing financial institutions. It is possible that the integration process related to the acquisition
could disrupt our ongoing business or result in inconsistencies in customer service that could adversely affect our ability to maintain
relationships with clients, customers, depositors and employees. Our inability to overcome these risks could have a material adverse
effect on our business or financial condition, results of operations and future prospects. There is no assurance that our integration
efforts will not result in other unanticipated costs.
We will incur in significant costs related to the Scotiabank PR & USVI Acquisition.
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We expect to incur certain one-time restructuring charges in connection with the Scotiabank PR & USVI Acquisition. The substantial
majority of non-recurring expenses resulting from the Scotiabank PR & USVI Acquisition will be comprised of transaction costs
related to the acquisition, financing arrangements and employment-related costs. We also will incur transaction fees and costs related
to formulating and implementing integration plans. We continue to assess the magnitude of these costs, and additional unanticipated
costs may be incurred in the business integration of the two groups of companies. Although we expect that the elimination of
duplicative costs, as well as the realization of other efficiencies or synergies related to the integration of the businesses should allow us
to offset incremental transaction and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.
OPERATIONS AND BUSINESS RISK
Non-Compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines and other sanctions.
Financial institutions are generally required under the USA Patriot Act and the Bank Secrecy Act to develop programs to prevent such
financial institutions from being used for money-laundering and terrorist financing activities. Financial institutions are generally also
required to file suspicious activity reports with the Financial Crimes Enforcement Network of the U.S. Treasury Department if such
activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity
of customers seeking to open new financial accounts. We have developed a compliance program reasonably designed to ensure
compliance with such laws and regulations. Our failure or the inability to comply with these regulations could result in enforcement
actions, fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators, costly litigation, or
expensive additional internal controls and systems.
We are subject to security and operational risks related to our use of technology, including the risk of cyber-attack or cyber theft.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and
networks regarding our customers and their accounts. To provide these products and services, we use information systems and
infrastructure that we and third-party service providers operate. As a financial institution, we also are subject to and examined for
compliance with an array of data protection laws, regulations and guidance, as well as to our own internal privacy and information
security policies and programs.
Such incidents may include unauthorized access to our digital systems for purposes of misappropriation of assets, gaining access to
sensitive information, corrupting data, or causing operational disruption. Although our information technology structure continues to
be subject to cyber attacks, we have not, to our knowledge, experience a breach of cyber-security. Such an event could compromise
our confidential information, as well as that of our customers and third parties with whom we interact with and may result in negative
consequences.
While we have policies and procedures designated to prevent or limit the effects of a possible security breach of our information
systems, if unauthorized persons were somehow to get access to confidential information in our possession or to our proprietary
information, it could result in significant legal and financial exposure, damage to our reputation or a loss of confidence in the security
of our systems that could adversely affect our business. Though we have insurance against some cyber-risks and attacks, it may not be
sufficient to offset the impact of a material loss event.
We rely on third parties to provide services and systems essential to the operation of our business, and any failure, interruption or
termination of such services or systems could have a material adverse affect on our financial condition and results of operations.
Our business relies on the secure, successful and uninterrupted functioning of our core banking platform, information technology,
telecommunications, and loan servicing. We outsource some of our major systems, such as customer data and deposit processing, part
of our mortgage loan servicing, internet and mobile banking, and electronic fund transfer systems. We also rely upon a transition
services agreement with The Bank of Nova Scotia to operate the acquired business. The failure or interruption of such systems, or the
termination of a third-party software license or any service agreement on which any of these systems or services is based, could
interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-
party systems, we could experience service denials if demand for such services exceeds capacity or such systems fail or experience
interruptions. In addition, replacing third party service providers could also entail significant delay and expense.
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If sustained or repeated, a failure, denial or termination of such systems or services could result in a deterioration of our ability to
process new loans, service existing loans, gather deposits and/or provide customer service. It could also compromise our ability to
operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and
possible financial liability. Any of the foregoing could have a material adverse effect on our financial condition and results of
operations.
Our risk management policies, procedures and systems may be inadequate to mitigate all risks inherent in our various businesses.
A comprehensive risk management function is essential to the financial and operational success of our business. The types of risk we
monitor and seek to manage include, but are not limited to, operational, technological, organizational, market, fiduciary, legal,
compliance, liquidity and credit risks. We have adopted various policies, procedures and systems to monitor and manage these risks.
There can be no assurance that those policies, procedures and systems are adequate to identify and mitigate all risks inherent in our
various businesses. Our businesses and the markets in which we operate are also continuously evolving. If we fail to fully understand
the implications of changes in our business or the financial markets and to adequately or timely enhance the risk framework to address
those changes, we could incur losses. In addition, in a difficult or less liquid market environment, our risk management strategies may
not be effective because other market participants may be attempting to use the same or similar strategies to deal with the challenging
market conditions. In such circumstances, it may be difficult for us to reduce our risk positions due to the activity of such other market
participants.
LIQUIDITY RISK
Our business could be adversely affected if we cannot maintain access to stable funding sources.
Our business requires continuous access to various funding sources. We are able to fund our operations through deposits as well as
through advances from the FHLB-NY and FRB-NY; however, our business may need to access other wholesale funding sources, such
as repurchase agreements and brokered deposits, which consisted of approximately 4% of our total interest-bearing liabilities as of
December 31, 2019.
Brokered deposits are typically sold through an intermediary to small retail investors. Our ability to continue to attract brokered
deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, our
credit rating and the relative interest rates that we are prepared to pay for these liabilities. Brokered deposits are generally considered a
less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally
more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in
interest rates offered on deposits.
We expect to have continued access to credit from the foregoing sources of funds. However, there can be no assurance that such
financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption, or if
negative developments occur with respect to us, the availability and cost of funding sources could be adversely affected. In that event,
our cost of funds may increase, thereby reducing the net interest income, or we may need to dispose of a portion of the investment
portfolio, which, depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting
consequences upon such dispositions. The interest rates that we pay on our securities are also influenced by, among other things,
applicable credit ratings from recognized rating agencies. A downgrade to any of these credit ratings could affect our ability to access
the capital markets, increase our borrowing costs and have a negative impact on our results of operations. Our efforts to monitor and
manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other
reductions in liquidity driven by us or market-related events. In the event that such sources of funds are reduced or eliminated, and we
are not able to replace them on a cost-effective basis, we may be forced to curtail or cease our loan origination business and treasury
activities, which would have a material adverse effect on our operations and financial condition.
Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends.
21
We are a separate and distinct legal entity from our subsidiaries. Dividends to us from our subsidiaries have represented a major
source of funds for us to pay dividends on our common and preferred stock, make payments on corporate debt securities and meet
other obligations. There are various U.S. federal and Puerto Rico law limitations on the extent to which Oriental Bank, our main
subsidiary, can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory
capital requirements, U.S. federal and Puerto Rico banking law requirements concerning the payment of dividends out of net profits or
surplus, Sections 23A and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Board governing transactions
between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound
practices. Further, under the Basel III capital rules adopted by the federal banking regulatory agencies, a banking organization will
need to hold a capital conservation buffer (composed of common equity tier 1 capital) greater than 2.5% of total risk-weighted assets
to avoid limitations on capital distributions and discretionary bonus payments. Compliance with the capital conservation buffer is
determined as of the end of the calendar quarter prior to any such capital distribution or discretionary bonus payment.
If our subsidiaries’ earnings are not sufficient to make dividend payments while maintaining adequate capital levels, our liquidity may
be affected, and we may not be able to make dividend payments to our holders of common and preferred stock or payments on
outstanding corporate debt securities or meet other obligations, each of which could have a material adverse impact on our results of
operations, financial position or perception of financial health.
In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.
COMPETITIVE AND STRATEGIC RISK
Competition with other financial institutions could adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits and assets to manage. The competition in originating
loans and attracting assets comes principally from other U.S., Puerto Rico and foreign banks, investment advisors, securities broker-
dealers, mortgage banking companies, consumer finance companies, credit unions, insurance companies, and other institutional
lenders and purchasers of loans. We will encounter greater competition as we expand our operations. Increased competition may
require us to increase the rates paid on deposits or lower the rates charged on loans which could adversely affect our profitability.
We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.
Our operations are subject to extensive regulation by federal and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on all or part of our operations. Because our business is
highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the
Dodd-Frank Act has a broad impact on the financial services industry, including significant regulatory and compliance changes, as
discussed under the subheading “Dodd-Frank Wall Street Reform and Consumer Protection Act” in Item 1of this annual report. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our
business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our
business.
We may be required to invest significant management attention and resources to evaluate and make necessary changes in order to
comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the
laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.
Competition in attracting talented people could adversely affect our operations.
We depend on our ability to attract and retain key personnel and we rely heavily on our management team. The inability to recruit and
retain key personnel or the unexpected loss of key managers may adversely affect our operations. Our success to date has been
influenced strongly by the ability to attract and retain senior management experienced in banking and financial services. Retention of
senior managers and appropriate succession planning will continue to be critical to the successful implementation of our strategies.
For a discussion of retention risk with respect to former Scotiabank’s employees, see “—We may not be able to integrate Scotiabank’s
PR & USVI assets into our operations.”
Reputational risk and social factors may impact our results.
22
Our ability to originate loans and to attract deposits and assets is highly dependent upon the perceptions of consumer, commercial and
funding markets of our business practices and our financial health. Negative public opinion could result from actual or alleged conduct
in any number of activities or circumstances, including lending practices, regulatory compliance, inadequate protection of customer
information, or sales and marketing, and from actions taken by regulators in response to such conduct. Adverse perceptions regarding
us could lead to difficulties in originating loans and generating and maintaining accounts as well as in financing them.
In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the
rate of defaults by account holders and borrowers. If consumers develop or maintain negative attitudes about incurring debt, or if
consumption trends decline, our business and financial results will be negatively affected.
ACCOUNTING AND TAX RISK
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies
may adversely affect our financial statements.
Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. Accordingly, from
time to time we are required to adopt new or revised accounting standards issued by FASB. Market conditions have prompted
accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related
to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. See “Note 1—Summary of
Significant Accounting Policies” to our consolidated financial statements included herein for a discussion of any accounting
developments that have been issued but not yet implemented. An assessment of proposed standards is not provided as such proposals
are subject to change through the exposure process and, therefore, the effects on our consolidated financial statements cannot be
meaningfully assessed. It is possible that future accounting standards that we are required to adopt could change the current
accounting treatment that applies to the consolidated financial statements and that such changes could have a material effect on our
financial condition and results of operations.
Our goodwill and other intangible assets could be determined to be impaired in the future and could decrease Oriental’s earnings.
We are required to test our goodwill, core deposit intangible, customer relationship intangible and other intangible assets for
impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our
common shares, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of
similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and
the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will
have little or no impact on the tangible book value of our common shares or our regulatory capital levels, but such an impairment loss
could significantly restrict Oriental’s ability to make dividend payments without prior regulatory approval.
Based on our annual goodwill impairment test, we determined that no impairment charges were necessary. As of December 31, 2019,
we had on our consolidated balance sheet $86.1 million of goodwill in connection with the BBVAPR Acquisition and the FDIC-
assisted Eurobank acquisition, $43.2 million of core deposit intangible in connection with the Scotiabank PR & USVI Acquisition and
the FDIC-assisted Eurobank acquisition and the BBVAPR Acquisition, a $13.2 million of customer relationship intangible in
connection with the Scotiabank PR & USVI Acquisition and the BBVAPR Acquisition, and a $0.5 million of other intangibles in
connection with the Scotiabank PR & USVI Acquisition. There can be no assurance that future evaluations of such goodwill or
intangibles will not result in any impairment charges. Among other factors, further declines in our common stock as a result of
macroeconomic conditions and the general weakness of the Puerto Rico economy, could lead to an impairment of such assets. If such
assets become impaired, it could have a negative impact on our results of operations.
Legislative and other measures that may be taken by Puerto Rico governmental authorities could materially increase our tax
burden or otherwise adversely affect our financial condition, results of operations or cash flows.
23
Legislative changes, particularly changes in tax laws, could adversely impact our results of operations. In an effort to address the
Commonwealth’s ongoing fiscal problems, the Puerto Rico government has enacted tax reforms in the past and is expected to do so in
the future. In 2014, the government of Puerto Rico approved an amendment to the PR Code, which, among other things, changed the
income tax rate for capital gains from 15% to 20%. In May 2015, the government approved an increase in the Puerto Rico sales and
use tax, effective July 1, 2015, from 7% to 11.5%, included a new 4% business to business tax and expanded the sales and use tax to
certain business services that were previously exempt. In addition, in December 2018, the Puerto Rico government enacted Act 257-
2018, which reduced the maximum corporate income tax rate from 39% to 37.5% included a restriction on the use of partnership gains
to offset current and accumulated operating losses generated by a corporate partner and amended the formula to compute the AMT,
among other changes, as described above under “Puerto Rico Internal Revenue Code,” Item 1. The recent change in tax rate resulted
in a reduction of our deferred tax assets, with a corresponding non-cash increase to income tax expense.
We operate two IBE Units and IBE Subsidiary pursuant to the IBE Act which provides significant tax advantages. The IBEs have an
exemption from Puerto Rico income taxes on interest earned on, or gain realized from the sale of, non-Puerto Rico assets, including
U.S. government obligations and certain mortgage-backed securities. This exemption has allowed us to have an effective tax rate
below the maximum statutory tax rate. In the past, the Legislature of Puerto Rico has considered proposals to curb the tax benefits
afforded to IBEs. In 2012, a new Puerto Rico law was enacted in this area, although it did not repeal the IBE Act, the new law does
not allow new license applications under the IBE Act. Any newly organized “international financial entity” must be licensed under a
new law and such entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and IBE
Subsidiary, which are “grandfathered”) are generally subject to a 4% Puerto Rico income tax rate. In the event other legislation is
enacted by the Puerto Rico government to eliminate or modify the tax exemption provided to IBEs, the consequences could have a
materially adverse impact on our financial results, including an increase in income tax expense and consequently our effective tax rate,
adversely affecting our financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Oriental owns a fifteen-story office building located at 254 Muñoz Rivera Avenue, San Juan Puerto Rico, known as Oriental Center,
where its executive offices are located. Oriental operates a full-service branch at the plaza level and our centralized units and
subsidiaries occupy approximately 86% of the office floor space. Approximately 4% of the office space is leased to outside tenants
and 10% is available for lease. Oriental also leases offices at 290 Jesus T. Piñero Avenue, San Juan, Puerto Rico, where the recently
acquired operations of Scotiabank are located.
The Bank owns five branch premises and leases fifty branch commercial offices throughout Puerto Rico. As part of the Scotiabank PR
& USVI Acquisition on December 31, 2019, Oriental acquired two branch premises in the US Virgin Islands.
The Bank’s management believes that each of its facilities is well maintained and suitable for its purpose and can readily obtain
appropriate additional space as may be required at competitive rates by extending expiring leases or finding alternative space.
At December 31, 2019, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and
maintenance expenses payable by Oriental, was approximately $50.1 million.
Oriental’s investment in premises and equipment, exclusive of leasehold improvements at December 31, 2019, was $125.1 million,
gross of accumulated depreciation.
ITEM 3. LEGAL PROCEEDINGS
Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. Oriental is vigorously
contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the
opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on Oriental’s
financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
24
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. Information concerning the
range of high and low sales prices for Oriental’s common stock for each quarter in the years ended December 31, 2019 and 2018, as
well as cash dividends declared for such periods is set forth under the sub-heading “Stockholders’ Equity” in the “Analysis of
Financial Condition” caption in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”).
Information concerning legal or regulatory restrictions on the payment of dividends by Oriental and the Bank is contained under the
sub-heading “Dividend Restrictions” in Item 1 of this annual report.
As of December 31, 2019, Oriental had approximately 5,154 holders of record of its common stock, including all directors and
officers of Oriental, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees.
Stock Performance Graph
The graph below compares the percentage change in Oriental’s cumulative total stockholder return during the measurement period
with the cumulative total return, assuming reinvestment of dividends, of the Russell 2000 Index and the SNL Bank Index.
The cumulative total stockholder return was obtained by dividing (a) the sum of (i) the cumulative amount of dividends per share,
assuming dividend reinvestment, for the measurement period beginning December 31, 2014, and (ii) the difference between the share
price at the beginning and the end of the measurement period, by (b) the share price at the beginning of the measurement period.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
25
Index
OFG Bancorp
Russell 2000
SNL Bank
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
100.00
100.00
45.39
95.59
101.71
83.40
115.95
128.51
61.33
132.94
151.75
109.33
118.30
126.12
158.81
148.49
170.79
26
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under Item 7 and “Financial Statements and Supplementary Data” under Item 8 of this annual
report.
OFG Bancorp
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 2019, 2018, 2017, 2016, AND 2015
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
2019
373,795 $
51,002
322,793
96,792
226,001
82,493
233,244
75,250
21,409
53,841
(6,512)
2018
Year Ended December 31,
2017
(In thousands, except per share data)
360,419 $
44,525
345,647 $
41,475
2016
315,894
56,108
259,786
80,095
207,081
132,800
48,390
84,410
(12,024)
304,172
113,139
191,033
78,687
201,631
68,089
15,443
52,646
(13,862)
2015
406,568
69,196
337,372
161,501
175,871
52,472
248,401
(20,058)
(17,554)
(2,504)
(13,862)
356,592 $
57,165
299,427
65,076
234,351
66,819
215,990
85,180
25,994
59,186
(13,862)
47,329 $
72,386 $
38,784 $
45,324 $
(16,366)
0.92 $
0.92 $
1.59 $
1.52 $
0.88 $
0.88 $
1.03 $
1.03 $
51,335
45,400
43,939
43,913
(0.37)
(0.37)
51,455
51,719
51,349
51,096
51,088
44,231
0.28
0.25
0.24
0.24
0.36
14,367
11,512
10,553
10,544
15,932
0.83%
1.31%
0.84%
0.88%
-0.03%
5.42%
4.91%
11.24%
58.88%
5.26%
5.37%
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%
27
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
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
$
$
$
$
$
$
$
$
$
$
$
2019
2018
December 31,
2017
(In thousands, except per share data)
2016
1,087,814 $
6,641,847
7,729,661 $
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 $
7,698,610 $
190,274
115,287
8,004,171 $
92,000 $
59,885
621,515
95,779
279,646
(102,339)
(1,008)
1,045,478 $
18.75 $
15.96 $
23.61 $
9.24%
10.78%
12.49%
13.76%
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 $
92,000 $
59,885
619,381
90,167
253,040
(103,633)
(10,963)
999,877 $
17.90 $
16.15 $
16.46 $
14.22%
16.78%
19.20%
20.48%
176,000 $
52,626
541,600
81,454
200,878
(104,502)
(2,949)
945,107 $
17.73 $
15.67 $
9.40 $
13.92%
14.59%
19.05%
20.34%
176,000 $
52,626
540,948
76,293
177,808
(104,860)
1,596
920,411 $
17.18 $
15.08 $
13.10 $
12.99%
14.05%
18.35%
19.62%
2015
1,615,872
4,434,213
6,050,085
4,717,751
934,691
436,843
6,089,285
176,000
52,626
540,512
70,435
148,886
(105,379)
13,997
897,077
16.67
14.53
7.32
11.18%
12.14%
15.99%
17.29%
3,136,884 $
2,375,871
5,512,755 $
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
28
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:
2019
Year Ended December 31,
2017
2018
2016
2015
Consolidated Ratios of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
Excluding interests on deposits
Including interests on deposits
4.65x
2.18x
5.54x
3.03x
2.91x
1.92x
2.60x
1.97x
(A)
(A)
(A) In 2015, earnings were not sufficient to cover preferred stock dividends, and the ratio was less than 1:1. The Company would have had to generate additional
earnings of $34 million to achieve a ratio of 1:1 in 2015.
For purposes of computing these consolidated ratios, earnings represent income before income taxes plus fixed charges and
amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of
debt issuance costs, and Oriental’s estimate of the interest component of rental expense. The term “preferred stock dividends” is the
amount of pre-tax earnings that is required to pay dividends on Oriental’s outstanding preferred stock. As of December 31, 2019 and
2018, Oriental had noncumulative perpetual preferred stock issued and outstanding amounting to $92.0 million, as follows:
(i) Series A amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value; (ii) Series B amounting to $34.5 million or
1,380,000 shares at a $25 liquidation value; and (iii) Series D amounting to $24.0 million or 960,000 shares at a $25 liquidation value.
As of December 31, 2017, 2016 and 2015, Oriental had non-cumulative perpetual preferred stock issued and outstanding amounting to
$176.0 million, which included $84.0 million or 84,000 shares of Series C at $1,000 liquidation value, which was converted on
October 22, 2018 by Oriental into common shares at a conversion rate of 86.4225.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by Oriental conform with GAAP and general practices within the financial services
industry. Oriental’s significant accounting policies are described in detail in Note 1 to the consolidated financial statements and should
be read in conjunction with this section.
Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the
effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and
circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those
estimates. The following MD&A section is a summary of what management considers Oriental’s critical accounting policies and
estimates.
Business Combinations
Oriental accounted for the Scotiabank PR & USVI Acquisition, the BBVAPR Acquisition and the FDIC-assisted acquisition of
Eurobank under the accounting guidance of ASC Topic No. 805, Business Combinations, which requires the use of the acquisition
method of accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan losses
related to the acquired loans was recorded on the acquisition date. Loans acquired were recorded at fair value in accordance with the
fair value methodology prescribed in ASC Topic 820.
The fair values initially assigned to assets acquired and liabilities assumed are preliminary and subject to refinement for up to one year
after the closing date of the acquisition as new information relative to closing date fair values becomes available.
Acquisition Accounting for Loans
Oriental has acquired loans in three separate acquisitions, the Scotiabank PR & USVI Acquisition in December 2019, the BBVAPR
Acquisition in December 2012 and the FDIC-assisted Eurobank acquisition in April 2010. Oriental accounted for all acquisitions
under the accounting guidance of ASC Topic 805, Business Combinations, which requires the use of the acquisition method of
accounting.
The initial valuation of these loans required management to make subjective judgments concerning estimates about how the acquired
loans would perform in the future using valuation methods, including discounted cash flow analyses and independent third-party
appraisals. Factors that may significantly affect the initial valuation included, among others, market-based and industry data related to
expected changes in interest rates, assumptions related to probability and severity of credit losses, discount rates, estimated timing of
credit losses including the timing of foreclosure and liquidation of collateral, expected prepayment rates, required or anticipated loan
modifications, unfunded loan commitments, and specific industry and market conditions that may impact discount rates and
independent third-party appraisals.
For the Scotiabank PR & USVI, BBVAPR and Eurobank acquisitions, Oriental considered the following factors as indicators that an
acquired loan had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:
• Loans that were 90 days or more past due;
• Loans that had an internal loan grade of substandard or worse - substandard loans have a well-defined weakness that
jeopardizes collection of the loan;
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and
30
• Loans that had been previously modified in a troubled debt restructuring.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Performing loans acquired at a premium and several
performing loans that were acquired with credit discount in the Scotiabank PR & USVI Acquisition are accounted for under this
guidance. Loans acquired with credit discount and that showed specific credit risk indicators are accounted for under the provisions of
ASC 310-30. Also, performing auto loans with FICO scores over 660 acquired at a premium in the BBVAPR Acquisition are
accounted for under this guidance. Auto loans with FICO scores below 660 were acquired at a discount and are accounted for under
the provisions of ASC 310-30. The provisions of ASC 310-20 require that any differences between the contractually required loan
payments in excess of Oriental’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of
the loan. Acquired loans that were accounted for under the provisions of ASC 310-20, which had fully amortized their premium or
discount recorded at the date of acquisition, are removed from the acquired loan category. Loans accounted for under ASC 310-20 are
placed on non-accrual status when past due in accordance with Oriental’s non-accrual policy and any accretion of discount is
discontinued. These assets were recorded at estimated fair value on their acquisition date, incorporating an estimate of future expected
cash flows. Such fair value includes a credit discount which accounts for expected loan losses over the estimated life of these loans.
Management takes into consideration this credit discount when determining the necessary allowance for acquired loans that are
accounted for under the provisions of ASC 310-20.
The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated
loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Oriental performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. Oriental determined
that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the
valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit
losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the
amounts of contractually required principal and interest that Oriental did not expect to collect as of the acquisition date. Based on the
guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired
pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount
attributable, at least in part, to credit quality, and (iii) were not subsequently accounted for at fair value.
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as
the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred
over the life of the acquired loans. Subsequent decreases to the expected cash flows require Oriental to evaluate the need for an
addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated
allowance for loan losses, if any, and the reversal of a corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
Oriental’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the
acquired loans to date and Oriental’s best estimates for the expected lifetime credit performance of the loans using currently available
information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the
fair value adjustment.
In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount
of cash flows expected to be collected. Oriental performs such an evaluation on a quarterly basis on both its acquired loans
individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy.
31
Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this
evaluation, a determination is made as to whether or not Oriental has a reasonable expectation about the timing and amount of cash
flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For mortgage and other consumer loans, cash flow loss estimates are calculated based on a model that incorporates probability
of default, loss severity and prepayment rates. For commercial loans cash flow loss estimates consider loss severity, and probability of
default is assigned, through loan grades, to each pool with consideration given for pool make-up. Probability of default is developed
from internally generated historical loss data and are applied to each pool.
To the extent that Oriental cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for
loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as Oriental can reasonably
estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest in Oriental’s financial statement disclosures, regardless
of whether or not Oriental expects any principal or interest cash flows on an individual loan 90 days or more past due.
Oriental writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
Allowance for Loan and Lease Losses
One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan and lease
losses. The provision for loan losses charged to current operations is based on this determination. Oriental’s assessment of the
allowance for loan and lease losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies
in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.
For a detailed description of the principal factors used to determine the general reserves of the allowance for loan and lease losses and
for the principal enhancement’s management made to its methodology, refer to Notes 1 and 7 to the consolidated financial statements.
According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current
information and events, it is probable that the principal and/or interest are not going to be collected according to the original
contractual terms of the loan agreement. Current information and events include “environmental” factors, such as existing industry,
geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of
the loan is likely to occur. The collateral dependent method is generally used for the impairment determination on commercial loans
since the expected realizable value of the loan is based upon the proceeds received from the liquidation of the collateral property. For
commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject
borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash
flow to use the discounted cash flow valuation method. Appraisals may be adjusted due to their age, property conditions, geographical
area or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss
severity information that can provide historical trends in the real estate market. Discount rates used may change from time to time
based on management’s estimates.
For additional information on Oriental’s policy of its impaired loans, refer to Note 1 to the consolidated financial statements.
Oriental’s management evaluates the adequacy of the allowance for loan and lease losses on a quarterly basis following a systematic
methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of
the allowance for loan and lease losses, Oriental must rely on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect
management’s estimates are the years of historical data to include when estimating losses, the level of volatility of losses in a specific
portfolio, changes in underwriting standards, financial accounting standards and loan impairment measurement, among others.
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition
of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently,
the business, financial condition, liquidity, capital and results of operations could also be affected.
A restructuring constitutes a "troubled-debt restructuring" ("TDR") when Oriental separately concludes that the restructuring
constitutes a concession and the debtor is experiencing financial difficulties. For information on Oriental’s TDR policy, refer to Note 1
32
to the financial consolidated statements.
FINANCIAL HIGHLIGHTS
Fourth quarter of 2019:
•
•
•
•
Net loss to shareholders of $2.6 million, or ($0.05) per share, which included $21.5 million in acquisition related merger and
restructuring charges and $6.6 million in additional provision for non-performing loans the Company decided to sell in the
third quarter of 2019. Compares with third quarter of 2019 net income available to shareholders of $5.8 million, or $0.11 per
share fully diluted, and fourth quarter of 2018 net income of $23.1 million, or $0.45 per share.
The fourth quarter of 2019 core operations were strong, with net interest margin of 5.35% and loan production of $404.9
million. Most credit quality metrics improved.
During the quarter, Oriental obtained all regulatory approvals, developed an integration plan, and closed on the $560.0
million cash acquisition (excluding settlement amounts), adding $2.2 billion in net loans and $3.0 billion in low cost core
deposits.
Acquisition related merger and restructuring charges of $21.5 million, core deposit intangible of $41.5 million, customer
relationship intangible of $12.7 million and no goodwill.
Year ended 2019:
•
•
•
Net income available to shareholders of $47.3 million, or $0.92 per share fully diluted, which included acquisition related
merger and restructuring charges and increased provision from the sale of non-performing loans (NPLs).
On a non-GAAP basis, adjusted net income available to shareholders was $83.4 million or $1.61 per share, which compares
favorably to 2018 net income of $72.4 million, or $1.52 per share.
Oriental ended the year with book value of $18.75 per common share, up 4.8% from a year ago; tangible book value of
$15.96 per common share, down 1.2% as a result of the acquisition; total stockholders’ equity of $1.05 billion, up 4.6%; and
record total assets of $9.3 billion, up 41.2%.
Oriental prepared its consolidated financial statement using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the
‘reported basis”). In addition to analyzing Oriental’s results on the reported basis, management monitors the “Adjusted net income”
of Oriental and excludes the impact of certain transactions on the results of its operations. Management believes that “Adjusted net
income” provides meaningful information to investors about the underlying performance of Oriental’s ongoing operations. “Adjusted
net income” is a non-GAAP financial measure.
The table below describes adjustments to net income for the year ended December 31, 2019:
33
(Dollars in thousands) (unaudited)
U.S. GAAP net income
Non-GAAP adjustments:
Sale of mortgage-backed securities available-for-sale
Non-performing loans sold
Sale of fully charged-off loans
Merger and restructuring expenses
FDIC insurance assessment credit
Hacienda credit for hurricane Maria
Qualitative factors adjustment
Bargain purchase from Scotiabank PR & USVI
Adjusted net income (Non-GAAP)
Less: dividends on preferred stock
Adjusted net income available to common shareholders (Non-GAAP)
Adjusted earnings per common share - diluted (Non-GAAP)
Adjusted Performance Metrics - Reconciliation to GAAP Financial
Measures:
Net income
Non-GAAP adjustments
Adjusted net income (Non-GAAP)
Average assets
Return on average assets
Adjusted return on average assets (Non-GAAP)
Net income available to common shareholders
Non-GAAP adjustments
Adjusted net income available to common shareholders (Non-GAAP)
Average tangible common equity
Return on average tangible common stockholders' equity
Adjusted return on average tangible common stockholders' equity (Non-
GAAP)
Pre-tax
Income Tax
Effect
Impact on
Net Income
$
53,841
$
(8,267) $
54,319
(2,382)
24,054
(1,534)
(1,010)
(4,541)
(315)
1,984
(20,370)
893
(9,020)
575
-
1,703
-
$
$
$
$
$
(6,283) (a)
33,949 (b)
(1,489) (c)
15,034 (d)
(959) (e)
(1,010) (f)
(2,838) (g)
(315) (h)
89,931
(6,512)
83,419
1.61
53,841
36,090
89,931
6,464,329
0.83%
1.39%
47,329
36,090
83,419
874,015
5.45%
9.54%
34
Total non-interest expense
Non-GAAP adjustments, pre-tax
Adjusted total non-interest expense (Non-GAAP)
Net interest income
Total banking and financial service revenues
Efficiency ratio
Adjusted efficiency ratio (Non-GAAP)
$
233,244
(21,510)
211,734
322,793
73,365
396,158
58.88%
53.45%
(a) During 2019, the Company sold $672 million available-for-sale mortgage-backed securities and recognized a gain in the sale of $8.3
million.
(b) During 2019, the Company sold mostly non-performing loans, increasing the provision by $54.3 million.
(c) During 2019, the Company received $2.4 million proceeds from the sale of fully charged-off originated auto and consumer loans.
(d) During 2019, the Company entered into an agreement with Scotiabank to acquire its Puerto Rico and US Virgin Islands operations,
subject to customary closing conditions. On December 31, 2019, the Company completed the acquisition. As a result, $24.1 million were
incurred in related merger and restructuring charges.
(e) During 2019, the Company recognized an FDIC insurance assessment credit received amounting to $1.5 million.
(f) During 2019, the Company received an additional $1 million credit from Puerto Rico Treasury on employee retention during hurricane
Maria.
(g) During 2019, the Company had a reduction in provision for loan losses of $4.5 million as a result of the adjustment to the qualitative
factor related to sustained favorable macroeconomic conditions in Puerto Rico.
(h) On December 31, 2019, the Company acquired Scotiabank's Puerto Rico and USVI operations for $430.4 million, which approximated
the fair value of net assets acquired, and recorded a bargain purchase gain of $315 thousand. The determination of fair value may
necessitate the use of one year measurement period to adequately analyze all the factors used as of the acquisition date.
ANALYSIS OF RESULTS OF OPERATIONS
The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income,
expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the years ended December
31, 2019, 2018 and 2017:
35
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
Interest
Average rate
Average balance
December
2019
December
2018
December
December
2019
2018
(Dollars in thousands)
December
2019
December
2018
$
373,795 $
10,262
360,419
8,003
384,057
51,002
368,422
44,525
6.22%
0.17%
6.39%
0.96%
6.02% $
0.13%
6,009,494 $
-
5,985,523
-
6.15%
0.83%
6,009,494
5,297,318
5,985,523
5,353,398
333,055
323,897
5.43%
5.32%
712,176
632,125
5.60%
5.45%
20,879
32,340
2.37%
2.50%
879,885
1,293,407
13,041
33,920
34,434
101,166
44,861
111,718
292,179
23,872
10,331
2,877
829
37,909
9,787
339,875
6,698
39,038
35,499
86,734
42,112
95,805
260,150
27,248
14,408
2,880
3,861
48,397
12,834
321,381
2.11%
2.26%
5.50%
6.35%
11.94%
9.11%
7.64%
5.34%
7.21%
22.41%
16.24%
6.24%
12.13%
7.53%
1.95%
2.38%
618,446
1,498,331
343,982
1,637,389
5.20%
5.97%
11.94%
9.31%
7.40%
626,538
1,593,828
375,685
1,226,520
3,822,571
683,228
1,452,314
352,760
1,029,039
3,517,341
5.45%
7.54%
21.04%
11.61%
6.56%
13.83%
7.39%
446,716
143,258
12,838
5,104
499,874
191,176
13,691
33,251
607,916
80,676
4,511,163
737,992
92,801
4,348,134
373,795
360,419
6.22%
6.02%
6,009,494
5,985,523
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
Originated loans
Mortgage
Commercial
Consumer
Auto and leasing
Total originated loans
Acquired loans:
Acquired BBVAPR
Mortgage
Commercial
Consumer
Auto
Total acquired
BBVAPR loans
Acquired Eurobank
Total loans
Total interest-
earning assets
36
Interest
Average rate
Average balance
December
2019
December
2018
December
2019
December
2018
(Dollars in thousands)
December
2019
December
2018
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:
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
4,496
6,364
11,483
22,343
9,751
32,094
-
859
32,953
0.56%
0.62%
1.42%
0.86%
2.47%
1.02%
0.00%
0.00%
0.81%
0.42%
0.52%
1.13%
0.67%
1.97%
0.84%
0.00%
0.00%
0.67%
1,118,243
1,187,278
1,092,002
3,397,523
383,483
3,781,006
1,100,599
-
4,881,605
1,079,538
1,216,635
1,019,062
3,315,235
496,171
3,811,406
1,075,681
-
4,887,087
7,794
2.48%
2.18%
299,842
357,086
6,271
7,351
15,468
29,090
9,463
38,553
-
802
39,355
7,423
2,212
2,012
11,647
1,875
1,903
11,572
51,002
322,793
$
44,525
315,894
2.77%
5.58%
2.80%
0.96%
5.26%
5.37%
2.57%
5.28%
2.48%
0.83%
5.19%
5.28%
79,787
36,083
415,712
72,882
36,083
466,051
5,297,317
5,353,138
$
712,177
$
632,385
113.44%
111.81%
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
$
(3,315) $
11,023
7,708
(37)
(1,249)
239
(1,047)
8,755 $
(5,118)
18,494
13,376
6,402
(371)
446
6,477
6,899
(1,803) $
7,471
5,668
6,439
878
207
7,524
(1,856) $
37
TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Interest
Average rate
Average balance
December
2018
December
2017
December
December
2018
2017
(Dollars in thousands)
December
2018
December
2017
A - TAX EQUIVALENT
Interest-earning assets
Tax equivalent adjustment
Interest-earning assets - tax
Interest-bearing liabilities
Tax equivalent net interest
Tax equivalent interest rate
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities
Interest bearing cash and
Total investments
Originated loans
Mortgage
Commercial
Consumer
Auto and leasing
Total originated loans
Acquired loans:
Acquired BBVAPR
Mortgage
Commercial
Consumer
Auto
Total acquired
Acquired Eurobank
Total loans
Total interest-
$
360,419 $
8,003
368,422
44,525
323,897
345,647
4,791
350,438
41,476
308,962
32,340
6,698
39,038
35,499
86,734
42,112
95,805
260,150
27,248
14,408
2,880
3,861
48,397
12,834
321,381
360,419
28,607
4,619
33,226
37,465
71,685
39,133
78,626
226,909
30,205
20,488
4,534
9,726
64,953
20,559
312,421
345,647
6.02%
0.13%
6.15%
0.83%
5.32%
5.45%
2.50%
1.95%
2.38%
5.20%
5.97%
11.94%
9.31%
7.40%
5.45%
7.54%
21.04%
11.61%
6.58%
13.83%
7.39%
6.02%
5.94% $
0.08%
6.02%
0.79%
5.23%
5.31%
5,985,523 $
-
5,985,523
5,353,138
632,385
5,818,597
-
5,818,597
5,226,654
591,943
2.28%
1.06%
1.96%
1,293,407
343,982
1,637,389
5.37%
5.73%
11.99%
9.61%
7.33%
5.63%
8.53%
15.98%
10.72%
7.25%
15.04%
7.57%
5.94%
683,228
1,452,314
352,760
1,029,039
3,517,341
499,874
191,176
13,691
33,251
737,992
92,801
4,348,134
5,985,523
1,255,881
436,913
1,692,794
697,873
1,251,051
326,482
818,155
3,093,561
536,247
240,267
28,375
90,698
895,587
136,655
4,125,803
5,818,597
38
Interest
Average rate
Average balance
December
2018
December
2017
December
December
December
2018
2017
(Dollars in thousands)
2018
December
2017
4,496
6,364
11,483
22,343
9,751
32,094
-
859
32,953
7,794
1,875
1,903
11,572
44,525
315,894 $
3,893
5,922
11,352
21,167
8,211
29,378
-
920
30,298
7,223
2,398
1,556
11,177
41,475
304,172
0.42%
0.52%
1.51%
0.34%
1.97%
0.84%
0.00%
0.00%
0.67%
2.18%
2.57%
5.28%
2.48%
0.83%
5.19%
5.28%
1,079,538
1,216,635
1,019,062
3,315,235
496,171
3,811,406
1,075,681
-
4,887,087
357,086
72,882
36,083
466,051
5,353,138
1,059,051
1,170,800
1,039,034
3,268,885
557,115
3,826,000
860,287
-
4,686,287
401,070
103,214
36,083
540,367
5,226,654
0.37%
0.51%
1.46%
0.32%
1.47%
0.77%
0.00%
0.00%
0.65%
1.80%
2.32%
4.31%
2.07%
0.79%
5.15%
5.23%
$
632,385 $
591,943
111.81% $
111.33%
Interest-bearing liabilities:
Deposits:
NOW Accounts
Savings and money market
Time deposits
Total core deposits
Brokered deposits
Non-interest bearing deposits
Core deposit intangible
Total deposits
Borrowings:
Securities sold under
Advances from FHLB and
Subordinated capital notes
Total borrowings
Total interest-
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
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
1,298
(791)
(863)
(356)
12,147 $
6,900 $
(3,919)
2,981
1,357
1,362
687
3,406
(425) $
5,813
8,959
14,772
2,655
571
(176)
3,050
11,722
39
Net Interest Income
Net interest income is a function of the difference between rates earned on Oriental’s interest-earning assets and rates paid on its
interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities
(interest rate margin). Oriental constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net
interest income at adequate levels.
Comparison of the years ended December 31, 2019 and 2018
Net interest income of $322.8 million increased $13.4 million from $315.9 million. Interest rate spread increased 7 basis points to
5.26% from 5.19% and net interest margin increased 9 basis points to 5.37% from 5.28%. These increases are mainly due to the net
effect of an increase of 20 basis points in the average yield of total interest-earning assets and 13 basis points in the total average cost
of interest-bearing liabilities.
Net interest income was positively impacted by:
•
Increase in interest income from originated loans by $32.0 million and an increase in yield of 24 basis points, reflecting
higher volume balances by $27.1 million in commercial, consumer and auto loan portfolios and higher prices by $4.8 million;
and
• Higher interest income from cash and money market of $6.3 million and an increase in yield of 16 basis points, due to
increase in price and volume of $597 thousand and $5.7 million, respectively.
Net interest income was adversely impacted by:
• Decrease in the interest income from acquired loans of $13.5 million as such loans continue to be repaid and acquired non-
performing loans sold in 2019;
•
Increase in interest expense from deposits of $6.4 million, mainly from an increase in core deposits costs and volume of $5.7
million and $1.1 million, respectively; and
• Decrease in interest income from investment of $11.5 million reflecting mortgage-backed securities sale in 2019.
Comparison of the years ended December 31, 2018 and 2017
Net interest income of $315.9 million increased $11.7 million from $304.2 million. Interest rate spread increased 4 basis points to
5.19% from 5.15% and net interest margin increased 5 basis points to 5.28% from 5.23%. These increases are mainly due to the net
effect of an increase of 8 basis points in the average yield of total interest-earning assets and an increase of 4 basis point in average
cost of interest-bearing liabilities.
Net interest income increased as a result of:
• Higher interest income from investment of $5.8 million, reflecting an increase in interest rates of $6.8 million, partially offset
by a decrease in volume of $944 thousand. Cash and money market investments increased 87 basis points and investments
securities increased 22 basis points, both mainly due to higher rates; and
• Higher interest income from originated loans of $33.5 million, reflecting higher balances in the auto, commercial and
consumer portfolios. This increase also reflects higher interest rates in the originated loan portfolio by 7 basis points.
Such increases in net interest income were adversely impacted:
• A decrease of $24.5 million in the interest income from acquired loans as such loans continue to be repaid, and a decrease of
$2.6 million in cost recoveries.
40
TABLE 2 - NON-INTEREST INCOME SUMMARY
Banking service revenue
Wealth management revenue
Mortgage banking activities
Total banking and financial service revenue
Net gain (loss) on:
Sale of securities available for sale
Bargain purchase from Scotiabank PR & USVI acquisition
Early extinguishment of debt
Other non-interest income
Year Ended December 31,
2019
2018
(Dollars in thousands)
Variance
$
42,866 $
26,224
4,275
43,638
25,934
4,767
-1.8%
1.1%
-10.3%
73,365
74,339
-1.3%
8,274
315
(7)
546
-
-
-
5,757
100.0%
100.0%
-100.0%
-90.5%
Total non-interest income, net
$
82,493 $
80,096
3.0%
Non-Interest Income
Non-interest income is affected by the amount of the trust department assets under management, transactions generated by clients’
financial assets serviced by the securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities,
fees generated from loans and deposit accounts, and gains on sales of assets.
Comparison of years ended December 31, 2019 and 2018
Oriental recorded non-interest income, net, in the amount of $82.5 million, compared to $80.1 million, an increase of 3.0%, or $2.4
million. The net increase in non-interest income was mainly due to a gain on the sale of $8.3 million mortgage-backed securities
during the year, offset by a decrease of $5.2 million in other income from last year $5.0 million insurance recovery from hurricane
Maria.
Comparison of years ended December 31, 2018 and 2017
Oriental recorded non-interest income, net, in the amount of $80.1 million, compared to $78.7 million, an increase of 1.8%, or $1.4
million. The net increase in non-interest income was mainly due to:
• An increase of $4.2 million in banking service revenue, mainly due to higher electronic banking fees from higher transaction
volume and sales. Merchant business fees increased $2.1 million and debit card interchange fees increased $2.0 million.
• An increase of $717 thousand in mortgage banking activities, mainly from higher net servicing fees by $1.1 million due to
higher valuation of servicing asset by $931 thousand, related to an increase in price, partially offset by lower gains on loans
sold due to lower volume by $364 thousand; and
• A $5.0 million cash payment received from the Company’s insurance carrier covering hurricane Marias’s impact on
Oriental’s operations included in other non-interest income, offset by the sale of $166.0 million mortgage-backed securities at
a gain of $6.9 million and the FDIC shared-loss benefit of $1.4 million in 2017.
41
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Year Ended December 31,
2018
Variance %
2019
Compensation and employee benefits
Occupancy, equipment and infrastructure costs
Merger and restructuring charges
Electronic banking charges
Professional and service fees
Loss on sale of foreclosed real estate, other repossessed assets and credit related
expenses
Information technology expenses
Taxes, other than payroll and income taxes
Advertising, business promotion, and strategic initiatives
Loan servicing and clearing expenses
Communication
Insurance
Printing, postage, stationery and supplies
Director and investor relations
Other
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
$
$
82,533 $
30,052
24,054
21,244
14,629
11,498
9,865
8,749
5,208
4,853
3,315
3,309
2,468
1,216
10,251
233,244 $
76,524
33,084
-
21,234
12,442
13,552
8,227
9,017
5,084
4,810
3,447
6,249
2,217
1,089
10,105
207,081
58.88%
53.07%
35.38%
1.28%
1,433
$
$
57.59 $
3,148 $
36.95%
1.19%
1,392
54.97
3,124
7.9%
-9.2%
100.0%
0.0%
17.6%
-15.2%
19.9%
-3.0%
2.4%
0.9%
-3.8%
-47.0%
11.3%
11.7%
1.4%
12.6%
42
Non-Interest Expenses
Comparison of years ended December 31, 2019 and 2018
Non-interest expense was $233.2 million, representing an increase of 12.6%, or $26.1 million, compared to $207.1 million, when
compared with year ended 2018.
The increase in non-interest expenses was driven by:
• Merger and restructuring charges incurred in 2019 amounting to $24.1 million related to the Scotiabank PR & USVI
acquisition; and
• Higher compensation and employee benefits by $6.0 million, mainly from increase in average employees, medical insurance
costs, and stock compensation.
The decreases in the foregoing non-interest expenses were offset by:
• Lower occupancy, equipment and infrastructure costs by $3.0 million, mainly attributed to lower rent expenses due to the
termination of several lease contracts and the closure of branches in 2018; and
• Lower insurance expenses by $2.9 million, mainly driven by a $1.5 million insurance assessment credit from the savings
association insurance fund (SAIF) and lower SAIF expenses in 2019.
The efficiency ratio including acquisition related expenses of $24.1 million was 58.88%, up from 53.07%. The efficiency ratio
measures how much of Oriental’s revenues is used to pay operating expenses. Oriental computes its efficiency ratio by dividing non-
interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment
securities, derivatives gains or losses, other gains and losses, and other income that may be considered volatile in nature. Management
believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are
excluded from the efficiency ratio computation for the years ended December 31, 2019 and 2018 amounted to $8.8 million and $5.8
million, respectively.
Comparison of years ended December 31, 2018 and 2017
Non-interest expense was $207.1 million, representing an increase of 2.7% compared to $201.6 million.
The increase in non-interest expenses was driven by:
• Higher other operating expenses by $4.8 million, mainly attributed to an increase in the reasonable estimate accrual of claims
and settlements in the broker-dealer subsidiary and to minor repairs to physical assets related to the impact of hurricanes;
• Higher electronic banking charges by $1.9 million from increased transaction volume;
• Higher insurance expenses by $1.0 million related to an increase in insurance premiums renewal as a consequence of
hurricanes; and
• Higher credit-related expenses by $898 thousand related to higher legal fees on foreclosed properties and other real estate
owned expenses.
The increases in the foregoing non-interest expenses were offset by:
• Lower compensation and employee benefits by $3.2 million, mainly due to a decrease in the average number of employees.
43
The efficiency ratio improved from 53.99% to 53.07%. The efficiency ratio measures how much of Oriental’s revenues is used to pay
operating expenses. Oriental computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and
non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, FDIC shared-loss benefit,
losses on the early extinguishment of debt, other gains and losses, and other income that may be considered volatile in nature.
Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest
income that are excluded from efficiency ratio computation for the years ended December 31, 2018 and 2017 amounted to $5.8
million and $9.4 million, respectively.
Oriental implemented its disaster response plan as hurricanes Irma and Maria approached its service areas. To operate in disaster
response mode, Oriental incurred expenses for, among other things, buying diesel and generators for electric power, debris removal,
security services, property damages mitigation, and emergency communication with customers regarding the status of its banking
operations. Estimated losses at December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at December
31, 2018.
Oriental maintains insurance for casualty losses as well as for disaster response costs and certain revenue lost through business
interruption. Oriental received a $1.0 million partial payment from its insurance carrier in December 2017 and a $5.7 million payment
during 2018.
Provision for Loan and Lease Losses
Comparison of years ended December 31, 2019 and 2018
Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision
for the years was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses
based upon an evaluation of known and inherent risks.
Provision for loan and lease losses, net increased $40.7 million from $56.1 million to $96.8 million, resulting from:
•
•
Increase of $54.3 million primarily from the sale of $95.0 million unpaid principal balance of non-performing commercial
and mortgage loans, both acquired and originated;
Increase of $3.6 million from for the remaining balance of an originated commercial loan, pending to receive insurance
recovery on a property destroyed in a fire;
• Decrease of $2.4 million from the proceeds in the sale of $26.0 million of previously fully charged-off auto and consumer
loans; and
• Decrease of $4.5 million from the adjustment to qualitative factors of the allowance for loan and lease losses, reflecting
sustained favorable macroeconomic conditions in Puerto Rico.
Please refer to the "Allowance for Loan and Lease Losses" in the "Credit Risk Management" section of this MD&A for a more
detailed analysis of the allowance for loan and lease losses.
Comparison of years ended December 31, 2018 and 2017
Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision
for the year was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses
based upon an evaluation of known and inherent risks.
Provision for loan and lease losses decreased 50.4%, or $57.0 million, to $56.1 million. The decrease in the provision was mostly due
to:
• The hurricanes provision of $32.4 million in 2017;
• A $4.3 million provision in the second quarter of 2017 to charge-off the loss on sale of a loan to a Puerto Rico government
municipality and a $5.9 million provision to increase the general allowance on the remaining municipal loan portfolio; and
44
• The decrease in acquired loan portfolio provision of $9.2 million, mainly from lower portfolio balances.
Please refer to the "Allowance for Loan and Lease Losses" in the "Credit Risk Management" section of this MD&A for a more
detailed analysis of the allowance for loan and lease losses.
Income Taxes
Comparison of years ended December 31, 2019 and 2018
Effective Tax Rate was 28.5% in 2019 compared to 36.4% in 2018. The decline was primarily due a higher proportion of exempt
income and capital gains from the mortgage-backed securities sales at lower rates in 2019.
Comparison of years ended December 31, 2018 and 2017
Income tax expense was $48.4 million, compared to $15.4 million, reflecting the effective income tax rate of 33.6% and the net
income before income taxes of $132.8 million for 2018. The income tax expense included a non-cash expenses of $4.1 million
reflecting the impact of changes required as a result of new Puerto Rico tax reform legislation, which will reduce the corporate income
tax rate by 1.5% in 2019 and, therefore, caused Oriental to take a deferred tax asset write-down.
Business Segments
Oriental segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury.
Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic
characteristics of its services were also considered in the determination of the reportable segments. Oriental measures the performance
of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income,
loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is based on several
factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of
operations and the selected financial information by operating segment for the years ended December 31, 2019, 2018 and 2017.
Banking
Wealth
Management
Year Ended December 31, 2019
Total Major
Segments
Treasury
Consolidated
Eliminations
Total
$
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
$
337,448 $
(36,023)
301,425
(96,504)
47,517
(211,755)
2,207
-
42,890 $
16,084
26,806 $
69 $
-
69
-
26,649
(17,163)
-
(652)
8,903
3,339
5,564 $
(In thousands)
36,278 $
(14,979)
21,299
373,795 $
(51,002)
322,793
(288)
8,327
(4,326)
-
(1,555)
23,457 $
1,986
21,471 $
(96,792)
82,493
(233,244)
2,207
(2,207)
75,250 $
21,409
53,841 $
Total assets
$
7,486,314 $
33,369 $
2,865,186 $
10,384,869 $
45
- $
-
-
373,795
(51,002)
322,793
-
-
-
(2,207)
2,207
- $
-
- $
(1,087,208) $
(96,792)
82,493
(233,244)
-
-
75,250
21,409
53,841
9,297,661
Banking
Wealth
Management
Treasury
Total Major
Segments
Eliminations
Total
Consolidated
Year Ended December 31, 2018
Interest income
Interest expense
Net interest income
Provision for
loan and lease losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
$
320,084 $
(29,746)
290,338
46 $
-
46
(In thousands)
40,289 $
(14,779)
25,510
360,419 $
(44,525)
315,894
(55,885)
53,592
(186,460)
2,126
-
-
26,457
(16,440)
-
(788)
(223)
46
(4,181)
-
(1,338)
(56,108)
80,095
(207,081)
2,126
(2,126)
- $
-
-
-
-
-
(2,126)
2,126
360,419
(44,525)
315,894
(56,108)
80,095
(207,081)
-
-
Income before income taxes $
Income tax expense
Net income
$
103,711 $
40,447
63,264 $
9,275 $
3,617
5,658 $
19,814 $
4,325
15,489 $
132,800 $
48,389
84,411 $
- $
-
- $
132,800
48,389
84,411
Total assets
$ 5,863,067 $
25,757 $
1,708,455 $
7,597,279 $
(1,013,927) $
6,583,352
Year Ended December 31, 2017
Banking
Wealth
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
$
Interest income
Interest expense
Net interest income
Provision for loan and lease
losses
Non-interest income (loss)
Non-interest expenses
Intersegment revenue
Intersegment expenses
311,503 $
(26,308)
285,195
(113,108)
45,102
(184,567)
1,604
(748)
53 $
-
53
-
26,069
(13,486)
-
(1,137)
(In thousands)
34,091 $
(15,167)
18,924
345,647 $
(41,475)
304,172
(31)
7,516
(3,578)
748
(467)
(113,139)
78,687
(201,631)
2,352
(2,352)
- $
-
-
-
-
-
(2,352)
2,352
345,647
(41,475)
304,172
(113,139)
78,687
(201,631)
-
-
33,478 $
11,499 $
23,112 $
68,089 $
- $
68,089
Income before income taxes $
Income tax expense
(benefit)
Net income
Total assets
13,057
$
20,421 $
$ 5,597,077 $
4,485
7,014 $
25,980 $
(2,099)
25,211 $
1,536,417 $
15,443
52,646 $
7,159,474 $
-
- $
(970,421) $
15,443
52,646
6,189,053
46
Comparison of years ended December 31, 2019 and 2018
Banking
Oriental's banking segment net income before taxes decreased $60.8 million from $103.7 million to $42.9 million, mainly reflecting:
• Higher provision for loan and lease losses of $40.7 million, mainly from $54.1 million increase as a result of the sale of non-
performing loans and $3.6 million increase from a commercial loan on a property destroyed in a fire pending the insurance
recovery, partially offset by $2.4 million decrease from the sale of fully charged-off auto and consumer loans, and $4.5
million decrease from the adjustment to qualitative factors of the allowance for loan and lease losses;
•
•
Increase in interest expense from deposits of $6.3 million, mainly from an increase in core deposits costs and volume of $5.7
million and $1.1 million, respectively; and
Increase in non-interest expense from merger and restructuring charges of $24.1 million related to the Scotiabank PR &
USVI Acquisition.
Wealth Management
Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities. Net income from this segment remained leveled to prior year.
Treasury
Treasury segment net income before taxes increased $3.6 million from $19.8 million to $23.5 million, reflecting:
• An increase of $8.3 million from a gain on the sale of $672.5 million mortgage-backed securities during the year; and
• Decrease in interest income from investment of $11.5 million reflecting mortgage-backed securities sale in 2019, partially
offset by $5.7 million increase in cash volume.
Comparison of years ended December 31, 2018 and 2017
Banking
Oriental's banking segment net income before taxes increased $64.2 million from $39.5 million to $103.7 million, mainly reflecting:
• The special provision for loan and lease losses of $32.4 million related to hurricanes Irma and Maria in 2017;
• A $4.3 million provision in the second quarter of 2017 to charge-off the loss on sale of a loan to a Puerto Rico government
municipality and a $5.9 million provision to increase the general allowance on the remaining municipal loan portfolio;
• A decrease in acquired loan portfolio provision of $9.2 million, mainly from lower portfolio balances; and
47
• A $5.0 million cash payment received from the Company’s insurance carrier covering hurricane Maria’s impact on Oriental’s
operations included in other non-interest income.
Wealth Management
Wealth management segment revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased $1.4 million to $5.7 million due to higher non-interest expenses by $3.0 million, mainly driven from the
increase in the reasonable estimate accrual of claims and settlements in the broker-dealer subsidiary by $4.2 million.
Treasury
Treasury segment net income before taxes decreased $1.6 million from $21.4 million to $19.8 million, reflecting:
• The sale of $166.0 million in mortgage-backed securities during the second quarter of 2017, which generated a gain of $6.9
million.
Such decrease was partially offset by:
• Higher interest income from investment by $5.8 million, reflecting an increase in interest rates of $6.8 million, partially offset
by a decrease in volume of $944 thousand.
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At December 31, 2019, Oriental’s total assets amounted to $9.298 billion representing an increase of 41.2%, attributable to the
Scotiabank PR & USVI Acquisition, when compared to $6.583 billion at December 31, 2018. Loans portfolio increased $2.2 billion
and cash increased $404.3 million, while investments decreased $191.8 million.
On January 1, 2019, Oriental reclassified $424.7 million of its held-to-maturity securities into available-for-sale securities as a result
of the adoption of ASU 2017-12. During the year ended December 31, 2019 Oriental sold $672.2 million of its available for sale
mortgage-backed securities at a gain of $8.3 million in order to fund Oriental’s growth plans, including the Scotiabank transaction. As
a result of these sales, cash increased 90.4% to $851.3 million.
Oriental’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other
commercial and industrial loans, consumer loans, and auto loans. At December 31, 2019, Oriental’s loan portfolio increased 49.9%,
mainly due to the Scotiabank PR & USVI Acquisition. Loan production during 2019 reached $1.299 billion compared to $1.411
billion in the year ago period, an 8.0% decrease, mainly from lower originations in the commercial and the US loan program
portfolios. The non-acquired loan portfolio increased $139.2 million from December 31, 2018 to $3.884 billion at December 31, 2019.
From December 31, 2018, the BBVAPR acquired loan portfolio decreased $141.0 million to $535.5 million and the Eurobank
acquired loan portfolio decreased $23.2 million to $63.9 million at December 31, 2019. During the year ended December 31, 2019,
Oriental sold $168.8 million unpaid principal balance in non-performing mortgage and commercial loans, both acquired and
originated, and recognized them at their fair value.
In addition, assets reflect the adoption of the Accounting Standard Update (“ASU”) No. 2016-02, under the effective date method,
which requires lessees to recognize a right-of-use asset and related lease liability for lease classified as operating leases, prospectively.
At December 31, 2019, the right of use assets amounted to $39.1 million, including $19.5 million from the Scotiabank PR & USVI
Acquisition.
On December 31, 2019, Oriental received $492.1 million cash and cash equivalents, $576.3 million investments and $2.2 billion loans
through the Scotiabank PR & USVI Acquisition. As part of this acquisition, Oriental recorded $41.5 million core deposit intangible,
$12.7 million core relationship intangible, and $567 thousand other intangible assets. Net cash settlement paid was $430.4 million.
48
Financial Assets Managed
Oriental’s financial assets include those managed by Oriental’s trust division, retirement plan administration subsidiary, and assets
gathered by its broker-dealer and insurance subsidiaries. Oriental’s trust division offers various types of individual retirement accounts
("IRAs") and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan
administration subsidiary, OPC, manages private retirement plans. At December 31, 2019, total assets managed by Oriental’s trust
division and OPC amounted to $3.137 billion, compared to $2.771 billion at December 31, 2018. Oriental Financial Services offers a
wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds
and money management wrap-fee programs. At December 31, 2019, total assets gathered by Oriental Financial Services and Oriental
Insurance from its customer investment accounts amounted to $2.376 billion, compared to $2.116 billion at December 31, 2018.
Changes in trust and broker-dealer related assets primarily reflect the addition of $49.7 million assets managed from the Scotiabank
PR & USVI Acquisition, changes in portfolio balances and differences in market values.
Goodwill
Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank Acquisition is not amortized to
expense but is tested at least annually for impairment. No goodwill was recorded in connection with the recent Scotiabank PR & USVI
Acquisition. A quantitative annual impairment test is not required if, based on a qualitative analysis, Oriental determines that the
existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. Oriental completes its
annual goodwill impairment test as of October 31 of each year. Oriental tests for impairment by first allocating its goodwill and other
assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values
of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the
book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill.
Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or
estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units,
selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due
to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different
assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is
required.
Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity
for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate,
adverse actions by a regulator, unanticipated competition, the loss of key employees, or similar events. Oriental’s loan portfolio,
which is the largest component of its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local
economic and fiscal conditions. Such conditions have generally affected the market demand for non-conforming loans secured by
assets in Puerto Rico and, therefore, affect the valuation of Oriental’s assets.
As of December 31, 2019, Oriental had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0
million to the Wealth Management unit. During the last quarter of 2019, based on its annual goodwill impairment test, Oriental
determined that both units passed step one of the two-step impairment test. As a result of step one, the fair value of both units
exceeded its adjusted net book value. Accordingly, Oriental determined that the carrying value of the goodwill allocated to the
Banking unit and Wealth Management was not impaired as of the valuation date.
49
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
FHLB stock
Other debt securities
Other investments
Total investments
Securities sold but not yet delivered
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
Right of use assets
Core deposit, customer relationship and other intangibles
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
FHLB stock
Other debt securities and other investments
50
December 31
Variance
2019
2018
(Dollars in thousands)
%
$
402,656 $
978,071
1,961
397,184
54,760
216,470
13,048
1,138
597
1,087,814
339
6,641,847
7,730,000
845,982
6,775
29,909
36,781
176,740
81,105
50,779
6
86,069
39,112
56,965
157,438
1,567,661
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
-
3,369
70,913
872,154
-58.8%
-13.4%
3575.9%
-14.5%
3.0%
3.2%
-6.9%
64.0%
-15.0%
100.0%
49.9%
35.3%
90.1%
37.4%
-11.4%
7.4%
55.4%
17.7%
373.9%
-98.3%
0.0%
100.0%
1590.9%
122.0%
79.7%
$
9,297,661 $
6,583,352
41.2%
37.0%
0.2%
36.5%
5.0%
19.9%
1.2%
76.5%
0.2%
0.8%
5.0%
16.4%
1.0%
0.2%
100.0%
0.1%
100.0%
TABLE 5 — LOANS RECEIVABLE COMPOSITION
December 31,
Variance
2019
2018
%
(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 Scotiabank PR & USVI loans
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Mortgage
Commercial
Consumer
Auto
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
Consumer
Auto
Total acquired Scotiabank loans, net
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
Auto
$
577,416 $
1,667,494
361,638
1,277,732
3,884,280
(83,471)
3,800,809
8,965
3,809,774
322,179
193,192
112,757
191,015
819,143
1,130,964
212,866
8,539
41,571
1,393,940
2,213,083
668,809
1,597,588
348,980
1,129,695
3,745,072
(95,188)
3,649,884
7,740
3,657,624
-
-
-
-
-
-
-
-
-
-
-
2,141
20,794
135
23,070
(1,573)
21,497
2,546
23,988
4,435
30,969
(2,062)
28,907
411,531
117,694
1,790
531,015
492,890
182,319
14,403
689,612
-13.7%
4.4%
3.6%
13.1%
3.7%
-12.3%
4.1%
15.8%
4.2%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
-15.9%
-13.3%
-97.0%
-25.5%
-23.7%
-25.6%
-16.5%
-35.4%
-87.6%
-23.0%
Allowance for loan and lease losses on acquired BBVAPR loans accounted
for under ASC 310-30
(17,036)
(42,010)
-59.4%
51
Total acquired BBVAPR loans, net
Acquired Eurobank loans:
Mortgage
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
513,979
535,476
647,602
676,509
48,617
29,041
724
78,382
(14,459)
63,923
2,812,482
6,622,256
19,591
6,641,847 $
63,392
47,826
846
112,064
(24,971)
87,093
763,602
4,421,226
10,368
4,431,594
$
-20.6%
-20.8%
-23.3%
-39.3%
-14.4%
-30.1%
-42.1%
-26.6%
268.3%
49.8%
89.0%
49.9%
52
Oriental’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as
"originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated among
acquired Scotiabank PR & USVI loans, acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were
purchased subject to loss-sharing agreements with the FDIC, which were terminated by the first quarter of 2017.
As shown in Table 5 above, total loans, net, amounted to $6.642 billion at December 31, 2019 and $4.432 billion at December 31,
2018. The loan portfolio increase was mainly attributable to the $2.2 billion in loans acquired in the Scotiabank PR & USVI
Acquisition. Oriental’s originated and other loans held-for-investment portfolio composition and trends were as follows:
• Mortgage loan portfolio amounted to $577.4 million (14.9% of the gross originated loan portfolio) compared to $668.8
million (17.9% of the gross originated loan portfolio) at December 31, 2018. Mortgage loan production totaled $92.8 million
for 2019, which represents a decrease of 22.5% from $119.7 million for 2018. Mortgage loans included delinquent loans in
the GNMA buy-back option program amounting to $10.8 million and $19.7 million at December 31, 2019 and December 31,
2018, respectively. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the
defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that
option.
• Commercial loan portfolio amounted to $1.667 billion (42.9% of the gross originated loan portfolio) compared to $1.598
billion (42.7% of the gross originated loan portfolio) at December 31, 2018. Commercial loan production, including the U.S.
loan program production of $112.8 million decreased 13.9% to $519.6 million for 2019, from $603.5 million for 2018.
• Consumer loan portfolio amounted to $361.6 million (9.3% of the gross originated loan portfolio) compared to $349.0
million (9.3% of the gross originated loan portfolio) at December 31, 2018. Consumer loan production increased 8.4% to
$178.7 million for 2019 from $164.9 million for 2018.
• Auto and leasing portfolio amounted to $1.278 billion (32.9% of the gross originated loan portfolio) compared to $1.130
million (30.1% of the gross originated loan portfolio) at December 31, 2018. Auto production continued strong at $508.2
million for 2019, compared to $523.4 million for 2018.
53
The following table summarizes the remaining contractual maturities of Oriental’s total gross loans, excluding loans accounted for
under ASC 310-30, segmented to reflect cash flows as of December 31, 2019. Contractual maturities do not necessarily reflect the
period of resolution of a loan, considering prepayments.
Maturities
From One to
Five Years
After Five Years
Balance
Outstanding
at December
31, 2019
One Year or
Less
Fixed
Interest
Rates
Variable
Interest
Rates
(In thousands)
Fixed
Interest
Rates
Variable
Interest
Rates
Originated and other
loans:
Mortgage
Commercial
Consumer
Auto and leasing
Total
$
577,416 $
9,150 $
434,726
231,041
598,568
$ 3,884,280 $ 1,220,816 $ 1,273,485 $
1,577 $
1,155,416
40,854
22,969
1,667,494
361,638
1,277,732
566,689 $
- $
77,352
-
89,743
-
-
656,195
- $ 1,389,979 $
Acquired Scotiabank
loans accounted under
ASC 310-20
Mortgage
Commercial
Consumer
Auto and leasing
Total
Acquired BBVAPR
loans accounted under
ASC 310-20
Commercial
Consumer
Auto
$
$
$
322,179 $
193,192
112,757
191,015
819,143 $
940 $
177,024
80,758
6,324
265,046 $
1,604 $
14,041
27,394
130,505
173,544 $
- $
-
-
-
- $
319,635 $
2,127
4,605
54,186
380,553 $
2,141 $
20,794
135
2,141 $
20,794
135
- $
-
-
- $
- $
-
-
- $
- $
-
-
- $
Total
$
23,070 $
23,070 $
54
-
-
-
-
-
-
-
-
-
-
-
-
-
-
TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS
December 31, 2019
Higher-Risk Residential Mortgage Loans*
High Loan-to-Value Ratio
Mortgages
Junior Lien Mortgages
Interest Only Loans
LTV 90% and over
Carrying
Carrying
Carrying
Value
Allowance Coverage Value
Allowance Coverage Value
Allowance Coverage
(In thousands)
$
$
7,673 $
53
-
65
24
7,815 $
201
4
-
8
3
216
2.62% $
7.55%
0.00%
12.31%
12.50%
2.76% $
7,378 $
-
-
-
280
7,658 $
155
-
-
-
26
181
2.10% $
0.00%
0.00%
0.00%
9.29%
2.36% $
66,542 $
1,666
684
1,214
5,410
75,516 $
1,568
300
97
151
446
2,562
2.36%
18.01%
14.18%
12.44%
8.24%
3.39%
0.20%
0.20%
1.93%
$
2,113 $
185
8.76% $
567 $
44
7.76% $
26,523 $
2,108
7.95%
27.04%
7.40%
35.12%
$
$
5,180 $
598
1,747
290
7,815 $
122
28
37
29
216
2.36% $
4.68%
2.12%
10.00%
2.76% $
1,508 $
1,434
3,347
1,369
7,658 $
25
23
55
78
181
1.66% $
1.60%
1.64%
5.70%
2.36% $
- $
-
-
75,516
75,516 $
-
-
-
2,562
2,562
-
-
-
3.39%
3.39%
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
Percentage of
Higher-Risk Loan
Category
Loan-to-Value
Ratio:
Under 70%
70% - 79%
80% - 89%
90% and over
* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans. Only
originated loans.
55
Deposits from the Puerto Rico government totaled $278.7 million at December 31, 2019. The following table includes the maturities
of Oriental's lending and investment exposure to the Puerto Rico government, which is limited solely to loans to municipalities
secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The
good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.
TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES
Loans and Securities:
Public corporations
Municipalities
Total
December 31, 2019
Carrying
Value
Less than 1
Year
1 to 3 Years
More than 3
Years
Maturity
(In thousands)
$
4,167
129,871
$
$
4,167
64,970
$
-
115
-
64,786
$
134,038
$
69,137
$
115
$
64,786
56
Credit Risk Management
Allowance for Loan and Lease Losses
Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses
based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses ("ALLL") policy provides for a
detailed quarterly analysis of probable losses.
The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial
condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses,
future additions to the allowance may be required based on factors beyond Oriental’s control. We also maintain an allowance for loan
losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to the
acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount
recorded at the time of acquisition.
At December 31, 2019, Oriental’s allowance for loan and lease losses amounted to $116.5 million, a $47.7 million decrease from
$164.2 million at December 31, 2018. Decrease was mainly related to the sale of non-performing loans during 2019.
Tables 8 through 10 set forth an analysis of activity in the allowance for loan and lease losses and present selected loan loss statistics.
In addition, Table 5 sets forth the composition of the loan portfolio.
Please refer to the “Provision for Loan and Lease Losses” section in this MD&A for a more detailed analysis of provisions for loan
and lease losses.
Non-performing Assets
Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December 31,
2019 and 2018, Oriental had $80.9 million and $119.7 million, respectively, of non-accrual loans, including acquired BBVAPR loans
accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium).
At December 31, 2019 and 2018, loans whose terms have been extended and which are classified as troubled-debt restructurings that
are not included in non-performing assets amounted to $103.7 million and $112.9 million, respectively.
At December 31, 2019 and 2018, loans that are current in their monthly payments, but placed in non-accrual amounted to $17.6
million and $21.2 million, respectively.
Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing
loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 12 months or more past
due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans.
Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC
310-30, in which these loans will accrete interest income over their remaining life using estimated cash flow analyses. Credit related
decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on
these loans when it is probable that all cash flows expected at acquisition will not be collected.
At December 31, 2019, Oriental’s non-performing assets decreased by 26.8% to $118.1 million (1.85% of total assets, excluding
acquired loans with deteriorated credit quality) from $161.3 million (2.76% of total assets, excluding acquired loans with deteriorated
credit quality) at December 31, 2018, reflecting the sale of $95.1 million of non-performing loans in 2019. Foreclosed real estate and
other repossessed assets amounting to $29.9 million and $3.3 million, respectively, at December 31, 2019, and $33.8 million and $3.0
million, respectively, at December 31, 2018, were recorded at fair value. Oriental does not expect non-performing loans to result in
significantly higher losses. At December 31, 2019, the allowance coverage ratio for originated loan and lease losses to non-performing
loans was 103.59% (77.38% at December 31, 2018).
57
Oriental follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio
consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans
offered by certain major U.S. mortgage loan originators. Furthermore, Oriental has never been active in negative amortization loans or
adjustable rate mortgage loans, including those with teaser rates.
The following items comprise originated and other loans held for investment non-performing assets:
Residential mortgage loans — are placed on non-accrual status when they become 90 days or more past due and are written-
down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured
mortgage loans which are placed in non-accrual when they become 12 months or more past due. At December 31, 2019,
Oriental’s originated non-performing mortgage loans totaled $22.6 million (26.6% of Oriental’s non-performing loans), a 66.6%
decrease from $63.7 million (51.1% of Oriental’s non-performing loans) at December 31, 2018.
Commercial loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if
necessary, based on the specific evaluation of the underlying collateral, if any. At December 31, 2019, Oriental’s originated non-
performing commercial loans amounted to $39.1 million (46.1% of Oriental’s non-performing loans), a 7.9% decrease from $42.5
million at December 31, 2018 (34.1% of Oriental’s non-performing loans).
Consumer loans — are placed on non-accrual status when they become 90 days past due and written-off when payments are
delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At December 31, 2019, Oriental’s
originated non-performing consumer loans amounted to $4.7 million (5.5% of Oriental’s non-performing loans), a 40.2% increase
from $3.4 million at December 31, 2018 (2.7% of Oriental’s non-performing loans).
Auto loans and leases — are placed on non-accrual status when they become 90 days past due, partially written-off to collateral
value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At December 31,
2019, Oriental’s originated non-performing auto loans and leases amounted to $14.2 million (16.8% of Oriental’s total non-
performing loans), an increase of 5.5% from $13.5 million at December 31, 2018 (10.8% of Oriental’s total non-performing
loans).
Oriental has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage
Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while
also reducing Oriental’s losses on non-performing mortgage loans.
The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled
mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RURAL, PRHFA, conventional loans
guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional
loans retained by Oriental. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium,
mortgage loan modification, partial claims (only FHA), short sale, and Deed In Lieu.
The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interest first,
variable interest rate, adjustable interest rate and other qualified loans. Non-traditional mortgage loan portfolios are segregated into the
following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting
guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed pursuant
Oriental’s current credit and underwriting guidelines. Oriental achieved an affordable and sustainable monthly payment by taking
specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring
the payment of principal or, if the borrower qualifies, refinancing the loan.
In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an
authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may
also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if Oriental
grants a concession for legal or economic reasons due to the debtor’s financial difficulties.
58
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN
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
$
$
December 31,
Variance
2019
2018
(Dollars in thousands)
%
8,727 $
25,989
16,882
31,873
83,471
$
10.5%
31.2%
20.2%
38.2%
100.0%
1.51%
1.56%
4.67%
2.49%
2.15%
19,783
30,326
15,571
29,508
95,188
20.8%
31.9%
16.4%
31.0%
100.0%
2.96%
1.90%
4.46%
2.61%
2.54%
38.70%
66.49%
359.12%
223.84%
103.59%
31.05%
71.43%
464.25%
218.67%
77.38%
-55.9%
-14.3%
8.4%
8.0%
-12.3%
-49.0%
-17.9%
4.7%
-4.6%
-15.4%
24.6%
-6.9%
-22.6%
2.4%
33.9%
59
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
2019
2018
(Dollars in thousands)
%
$
$
4 $
1,564
5
1,573
$
22
1,905
135
2,062
-81.8%
-17.9%
-96.3%
-23.7%
0.3%
99.4%
0.3%
100.0%
1.1%
92.4%
6.6%
100.00%
0.19%
7.52%
3.70%
6.82%
0.86%
7.94%
3.04%
6.66%
0.51%
420.43%
16.67%
131.96%
2.32%
478.64%
67.50%
133.20%
-77.9%
-5.3%
21.7%
2.4%
-78.0%
-12.2%
-75.3%
-0.9%
60
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
Acquired BBVAPR loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Auto
Total allowance balance
Allowance composition:
Mortgage
Commercial
Auto
Acquired Eurobank loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Consumer
Total allowance balance
Allowance composition:
Mortgage
Commercial
December 31,
Variance
2019
2018
(Dollars in thousands)
%
-38.4%
-67.5%
-84.6%
-59.4%
9,376 $
6,713
947
$
17,036
55.0%
39.4%
5.6%
100.0%
15,225
20,641
6,144
42,010
36.2%
49.1%
14.6%
100.0%
12,279 $
2,180
-
$
14,459
15,382
9,585
4
24,971
-20.2%
-77.3%
-100.0%
-42.1%
84.9%
15.1%
100.0%
61.6%
38.4%
100.0%
$
$
$
$
61
TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY
Originated and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for loan and lease losses
Balance at end of year
Acquired loans:
BBVAPR loans
Acquired loans accounted for
under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for loan and lease losses
Balance at end of year
Acquired loans accounted for
under ASC 310-30:
Balance at beginning of year
Provision for loan and lease losses
Allowance de-recognition
Balance at end of year
2019
Year Ended December 31,
Variance
2018
(Dollars in thousands)
%
2017
95,188 $
(96,825)
23,345
61,763
83,471 $
92,718
(72,393)
22,802
52,061
95,188
2.7% $
33.7%
2.4%
18.6%
-12.3% $
59,300
(61,856)
15,390
79,884
92,718
2,062 $
(1,868)
609
770
1,573 $
42,010 $
31,906
(56,880)
17,036 $
3,862
(2,837)
1,334
(297)
2,062
45,755
1,786
(5,531)
42,010
-46.6% $
-34.2%
-54.3%
-359.3%
-23.7% $
-8.2% $
1686.5%
928.4%
-59.4% $
4,300
(4,156)
1,871
1,847
3,862
31,056
24,681
(9,982)
45,755
$
$
$
$
$
$
$
Eurobank loans
Balance at beginning of year
Provision for loan and lease losses
Allowance de-recognition
Balance at end of year
Loans acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-20 (loans with revolving feature and/or
acquired at a premium) were recorded on acquisition date at their fair value. Such fair value includes a credit discount which accounts
for expected loan losses over the estimated life of these loans. Management will take into consideration this credit discount when
determining the necessary allowance for acquired loans that are accounted for under the provisions of ASC 310-20. Considering the
short period elapsed from acquisition date, at December 31, 2019 there was no allowance for loan and lease losses recorded for these
loans.
24,971 $
2,353
(12,865)
14,459 $
-0.8% $
-8.3%
364.4%
-42.1% $
25,174
2,567
(2,770)
24,971
21,281
6,725
(2,832)
25,174
$
Loans acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were recognized at fair value as of
December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at
acquisition date. To the extent credit deterioration occurs after the date of acquisition, Oriental would record an allowance for loan and
lease losses. Management determined that there was no need to record an allowance for loan and lease losses on loans acquired in the
Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 as of December 31, 2019. Considering the short period elapsed
from the acquisition date, Oriental does not believe that the difference between cash flows expected to be collected on the loans
acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 and those anticipated at December 31, 2019
need further assessment.
62
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS
ACCOUNTED FOR UNDER ASC 310-30
Originated and other loans and leases:
Mortgage
Charge-offs
Recoveries
Total
Commercial
Charge-offs
Recoveries
Total
Consumer
Charge-offs
Recoveries
Total
Auto
Charge-offs
Recoveries
Total
Net credit losses
Total charge-offs
Total recoveries
Total
Net credit losses to average
loans outstanding:
Mortgage
Commercial
Consumer
Auto
Total
Recoveries to charge-offs
Average originated loans:
Mortgage
Commercial
Consumer
Auto
Total
2019
Year Ended December 31,
Variance
2018
(Dollars in thousands)
%
2017
(18,564) $
1,533
(17,031)
(12,073)
1,104
(10,969)
(18,910)
2,014
(16,896)
(47,278)
18,694
(28,584)
(96,825)
23,345
(73,480) $
2.72%
0.69%
4.50%
2.33%
1.92%
24.11%
(5,297)
1,047
(4,250)
(6,782)
654
(6,128)
(17,629)
1,757
(15,872)
(42,685)
19,344
(23,341)
(72,393)
22,802
(49,591)
0.63%
0.42%
4.38%
2.27%
1.41%
31.50%
250.5% $
46.4%
300.7%
78.0%
68.8%
79.0%
7.3%
14.6%
6.5%
10.8%
-3.4%
22.5%
33.7%
2.4%
48.2% $
331.7%
64.3%
2.7%
2.6%
36.2%
-23.5%
(6,623)
586
(6,037)
(7,684)
1,281
(6,403)
(13,641)
1,209
(12,432)
(33,908)
12,314
(21,594)
(61,856)
15,390
(46,466)
0.85%
0.51%
3.81%
2.63%
1.37%
24.88%
626,538
1,593,828
375,685
1,226,520
3,822,571
$
671,068
1,445,379
362,231
1,028,061
3,506,739
-6.6% $
10.3%
3.7%
19.3%
9.0% $
709,933
1,255,645
326,482
819,863
3,111,923
$
$
$
$
63
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS
ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)
Acquired loans accounted for under ASC 310-20:
Commercial
Charge-offs
Recoveries
Total
Consumer
Charge-offs
Recoveries
Total
Auto
Charge-offs
Recoveries
Total
Net credit losses
Total charge-offs
Total recoveries
Total
Net credit losses to average
loans outstanding:
Commercial
Consumer
Auto
Total
Recoveries to charge-offs
Average loans accounted for under ASC 310-20:
Commercial
Consumer
Auto
Total
2019
Year Ended December 31,
Variance
2018
%
(Dollars in thousands)
2017
(123) $
6
(117)
(1,525)
353
(1,172)
(220)
250
30
(1,868)
609
(1,259) $
11.85%
9.10%
-1.85%
8.13%
32.60%
987
12,877
1,618
15,482
$
(6)
23
17
1950.0% $
-73.9%
-788.2%
(2,459)
480
(1,979)
(372)
831
459
-38.0%
-26.5%
-40.8%
-40.9%
-69.9%
-93.5%
(2,837)
1,334
(1,503)
-34.2%
-54.3%
-16.2% $
-1.23%
15.02%
-3.78%
5.63%
47.02%
-1063.4%
-39.4%
-50.9%
44.5%
-30.7%
1,379
13,174
12,153
26,706
-28.4% $
-2.3%
-86.7%
-42.0% $
(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%
387
57,971
38,587
96,945
$
$
$
$
64
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
Interest that would have been recorded in the period if the
loans had not been classified as non-accruing loans
December 31,
Variance
2019
2018
(Dollars in thousands)
(%)
$
$
$
$
23,587
57,336
41,679
78,047
3,317
500
84,740
29,909
3,327
117,976
$
$
4,302
541
124,569
33,768
2,986
161,323
1.85%
11.30%
2.76%
16.13%
-43.4%
-26.5%
-22.9%
-7.6%
-32.0%
-11.4%
11.4%
-26.9%
-33.0%
-29.9%
2019
Year Ended December 31,
2018
(In thousands)
2017
$
1,518
$
3,338
$
3,181
65
TABLE 12 — NON-PERFORMING LOANS
Non-performing loans:
Originated and other loans held for investment
Mortgage
Commercial
Consumer
Auto and leasing
Acquired Scotiabank loans accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Commercial
Consumer
Auto
Acquired BBVAPR 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 Scotiabank loans accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Commercial
Consumer
Acquired BBVAPR 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
66
December 31,
Variance
2019
2018
(Dollars in thousands)
%
-64.6%
-7.9%
40.2%
5.5%
-34.5%
100.0%
100.0%
100.0%
100.0%
-16.8%
-6.5%
-85.0%
-23.0%
-32.0%
$
$
22,552 $
39,089
4,701
14,239
80,581
63,717
42,456
3,354
13,494
123,021
2,727
214
26
2,967
-
-
-
-
790
372
30
1,192
84,740 $
950
398
200
1,548
124,569
26.6%
46.3%
5.5%
16.8%
51.1%
34.1%
2.7%
10.8%
3.2%
0.3%
0.0%
0.0%
0.9%
0.4%
0.0%
100.0%
0.8%
0.3%
0.2%
100.0%
1.79%
3.30%
-45.8%
1.33%
8.11%
2.13%
12.46%
-37.6%
-34.9%
0.52%
29.26%
1.16%
35.30%
-55.17%
-17.1%
122.98%
59.20%
107.7%
141.87%
120.67%
17.6%
TABLE 13 - 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
Lease liability
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
2019
2018
(Dollars in thousands)
%
$
1,675,315 $
1,903,757
1,836,480
2,271,286
7,686,838
11,772
7,698,610
190,274
78,009
36,083
1,195
305,561
8,004,171
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
913
21,599
39,840
185,660
8,252,183 $
333
16,937
-
87,665
5,583,475
$
51.6%
75.2%
51.5%
51.3%
56.7%
282.0%
56.9%
-58.2%
0.5%
0.0%
-1.6%
-46.4%
46.1%
174.2%
27.5%
100.0%
111.8%
47.8%
21.8%
24.8%
23.9%
29.5%
100.0%
62.3%
25.5%
0.4%
11.8%
100.0%
22.5%
22.1%
24.7%
30.7%
100.0%
79.9%
13.6%
0.2%
6.3%
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
$
$
$
190,000 $
299,842 $
461,954 $
454,723
357,086
457,053
67
Liabilities and Funding Sources
As shown in Table 13 above, at December 31, 2019, Oriental’s total liabilities were $8.252 billion, 47.8% more than the $5.583 billion
reported at December 31, 2018. Deposits and borrowings, Oriental’s funding sources, amounted to $8.004 billion at December 31,
2019 versus $5.479 billion at December 31, 2018, a 46.1% increase. These increases are attributable to the Scotiabank PR & USVI
Acquisition, which increased deposits by $3.0 billion.
Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At December 31, 2019,
borrowings amounted to $305.6 million, representing a decrease of 46.4% when compared with the $570.4 million reported at
December 31, 2018. The decrease in borrowings reflect the reduction of $265.2 million in repurchase agreements with the proceeds
from the sale of $672.2 million of mortgage-backed securities during 2019 as part of the deleverage in preparation for Scotiabank PR
& USVI Acquisition.
On January 1, 2019, Oriental adopted the Accounting Standard Update (“ASU”) No. 2016-02, under the effective date method, which
requires lessees to recognize a right-of-use asset and related lease liability for leases classified as operating leases prospectively. At
December 31, 2019, the lease liability amounted to $39.8 million, including $18.4 million from the Scotiabank PR & USVI
Acquisition.
At December 31, 2019, deposits represented 96% and borrowings represented 4% of interest-bearing liabilities. At December 31,
2019, deposits, the largest category of Oriental’s interest-bearing liabilities, were $7.699 billion, an increase of 56.9% from $4.908
billion at December 31, 2018. Such increase reflects the aforementioned $3.0 million in deposits from the Scotiabank PR & USVI
Acquisition, increasing customer deposits by 70.1% to $7.5 billion.
Stockholders’ Equity
At December 31, 2019, Oriental’s total stockholders’ equity was $1.045 billion, a 4.6% increase when compared to $999.9 million at
December 31, 2018. This increase in stockholders’ equity reflects increases in retained earnings of $26.6 million, legal surplus of $5.6
million and additional paid-in capital of $2.1 million; and decreases in accumulated other comprehensive loss, net of tax of $10.0
million and treasury stock, at cost, of $1.3 million. Book value per share was $18.75 at December 31, 2019 compared to $17.90 at
December 31, 2018.
From December 31, 2018 to December 31, 2019, tangible common equity to total assets decreased from 12.59% to 8.83%, leverage
capital ratio decreased from 14.22% to 9.24%, common equity tier 1 capital ratio decreased from 16.78% to 10.78%, tier 1 risk-based
capital ratio decreased from 19.20% to 12.49%, and total risk-based capital ratio decreased from 20.48% to 13.76%. The decrease in
these ratios reflect an increase of $3.0 billion in total assets mainly from the Scotiabank PR & USVI Acquisition.
On October 22, 2018, Oriental completed the conversion of all 84,000 shares of its Series C Preferred Stock into common stock. Each
share of Series C Preferred Stock was converted into 86.4225 shares of common stock. Upon conversion, the Series C Preferred Stock
is no longer outstanding and all rights with respect to the Series C Preferred Stock have ceased and terminated, except the right to
receive the number of whole shares of common stock issuable upon conversion of the Series C Preferred Stock and any required cash-
in-lieu of fractional shares.
Capital Rules to Implement Basel III Capital Requirements
Oriental and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The
current risk-based capital standards applicable to Oriental and the Bank (“Basel III capital rules”), which have been effective since
January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the
Basel Committee on Banking Supervision. As of December 31, 2019, the capital ratios of Oriental and the Bank continue to exceed
the minimum requirements for being “well-capitalized” under the Basel III capital rules.
The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage
capital as of December 31, 2019 and 2018, are calculated based on the Basel III capital rules related to the measurement of capital,
risk-weighted assets and average assets.
68
The following are the consolidated capital ratios of Oriental under the Basel III capital rules at December 31, 2019 and 2018:
TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA
December 31,
Variance
2019
2018
%
(Dollars in thousands, except
per share data)
$
1,045,478 $
999,877
4.6%
10.78%
4.50%
735,441
307,099
170,610
257,732
6,824,413
12.49%
6.00%
852,311 $
409,465 $
442,846 $
6,824,413 $
13.76%
8.00%
938,994 $
545,953 $
393,041 $
6,824,413 $
9.24%
4.00%
852,311 $
369,151 $
483,160 $
8.83%
12.02%
11.24%
15.32%
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%
51,398,956
18.75 $
15.96 $
23.61 $
1,213,529 $
51,293,924
17.90
16.15
16.46
844,298
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-35.8%
0.0%
-9.4%
41.1%
88.1%
-48.8%
41.1%
-34.9%
0.0%
-8.2%
41.1%
-30.6%
41.1%
-32.8%
0.0%
-5.2%
41.1%
-34.9%
41.1%
-35.0%
0.0%
-8.2%
41.4%
-27.6%
-29.9%
-29.8%
-26.0%
-25.9%
0.2%
4.7%
-1.1%
43.4%
43.7%
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
69
Common dividend data:
Cash dividends declared
Cash dividends declared per share
Payout ratio
Dividend yield
2019
Year Ended December 31,
Variance
2018
%
(Dollars in thousands)
2017
$
$
14,367 $
0.28 $
30.43%
1.19%
11,511
0.25
16.45%
1.52%
24.8% $
12.0% $
85.0%
-21.7%
10,553
0.24
27.91%
2.55%
The following table presents a reconciliation of Oriental’s total stockholders’ equity to tangible common equity and total assets to
tangible assets at December 31, 2019 and 2018:
Total stockholders' equity
Preferred stock
Preferred stock issuance costs
Goodwill
Core deposit intangible
Customer relationship intangible
Other intangibles
Total tangible common equity (non-GAAP)
Total assets
Goodwill
Core deposit intangible
Customer relationship intangible
Other intangibles
Total tangible assets
Tangible common equity to tangible assets
Common shares outstanding at end of period
Tangible book value per common share
December 31,
2019
2018
(In thousands, except share or
per
share information)
$
1,045,478 $
999,877
(92,000)
10,130
(86,069)
(43,185)
(13,213)
(567)
(92,000)
10,130
(86,069)
(2,480)
(888)
-
$
820,574 $
828,570
9,297,661
6,583,352
(86,069)
(43,185)
(13,213)
(567)
(86,069)
(2,480)
(888)
-
$
9,154,627 $
6,493,915
8.96%
12.76%
51,398,956
51,293,924
$
15.96 $
16.15
The tangible common equity ratio and tangible book value per common share are non-GAAP measures and, unlike tier 1 capital and
common equity tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the
tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to
compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures
should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance
with GAAP. Moreover, the manner in which Oriental calculates its tangible common equity, tangible assets and any other related
measures may differ from that of other companies reporting measures with similar names.
70
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. To mitigate
these limitations, Oriental has procedures in place to calculate these measures using the appropriate GAAP or regulatory components.
Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have
limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under
GAAP.
The following table presents Oriental’s capital adequacy information under the Basel III capital rules:
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
December 31,
Variance
2019
2018
(Dollars in thousands)
%
$
$
$
735,441 $
116,870
852,311
86,683
938,994 $
811,707
116,870
928,577
61,922
990,499
-9.4%
0.0%
-8.2%
40.0%
-5.2%
6,405,039 $
419,374
4,641,998
195,216
38.0%
114.8%
Total risk-weighted assets
$
6,824,413 $
4,837,214
41.1%
Ratios:
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
10.78%
12.49%
13.76%
9.24%
11.24%
8.83%
16.78%
19.20%
20.48%
14.22%
15.19%
12.59%
-35.8%
-34.9%
-32.8%
-35.0%
-26.0%
-29.9%
The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the
Bank’s regulatory capital ratios at December 31, 2019 and 2018:
71
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%)
Minimum to be well capitalized (6.5%)
Tier 1 Capital to Risk-Weighted Assets
Actual tier 1 risk-based capital
Minimum capital requirement (6%)
Minimum to be well capitalized (8%)
Total Capital to Risk-Weighted Assets
Actual total risk-based capital
Minimum capital requirement (8%)
Minimum to be well capitalized (10%)
Total Tier 1 Capital to Average Total Assets
Actual tier 1 capital
Minimum capital requirement (4%)
Minimum to be well capitalized (5%)
December 31,
Variance
2019
2018
(Dollars in thousands)
%
11.94%
813,444 $
306,542 $
170,301 $
442,783 $
11.94%
813,444 $
408,723 $
544,964 $
13.21%
899,844 $
544,964 $
681,205 $
8.85%
813,444 $
367,537 $
459,421 $
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
$
$
$
$
$
$
$
$
$
$
$
$
$
-35.1%
-8.4%
41.2%
88.2%
41.2%
-35.1%
-8.4%
41.2%
41.2%
-32.9%
-5.2%
41.2%
41.2%
-35.3%
-8.4%
41.6%
41.6%
72
Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At December 31, 2019 and
2018, Oriental’s market capitalization for its outstanding common stock was $1.214 billion ($23.61 per share) and $844.3 million
($16.46 per share), respectively.
The following table provides the high and low prices and dividends per share of Oriental’s common stock for each quarter of the last
three calendar years:
2019
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
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
Price
Dividend
High
Low
Per share
Cash
$
$
$
$
$
$
$
$
$
$
$
23.61 $
24.20 $
23.77 $
21.24 $
18.56 $
17.60 $
14.75 $
12.05 $
10.25 $
10.40 $
12.03 $
13.80 $
20.00 $
19.84 $
18.78 $
16.37 $
14.93 $
14.45 $
10.60 $
8.60 $
7.90 $
8.40 $
9.19 $
10.90 $
0.07
0.07
0.07
0.07
0.07
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 the year ended December 31, 2019.
At December 31, 2019, the number of shares that may yet be purchased under such program is estimated at 327,440 and was
calculated by dividing the remaining balance of $7.7 million by $23.61 (closing price of Oriental's common stock at December 31,
2019).
73
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated financial statements, Oriental has certain obligations and commitments to make future
payments under contracts. At December 31, 2019, the aggregate contractual obligations and commercial commitments, excluding
accrued interest and unamortized premiums (discounts), are as follows:
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
$
$
Total
Less than 1 year
Payments Due by Period
1 - 3 years
(In thousands)
190,000 $
77,849
35,000
190,000 $
31,955
-
- $
8,517
-
50,109
2,271,286
2,624,244 $
10,823
1,195,979
1,428,757 $
15,769
907,453
931,739 $
3 - 5 years
After 5 years
- $
33,018
-
10,159
167,854
211,031 $
-
4,359
35,000
13,358
-
52,717
Loan commitments, which represent unused lines of credit, increased to $853.1 million at December 31, 2019 as compared to
$541.4 million in December 31, 2018, while letters of credit provided to customers, increased to $49.4 million as compared to $24.2
million at December 31, 2018, mostly as a result of the commitments and letters of credit assumed as part of the Scotiabank PR &
USVI Acquisition, which amounted to $152.3 million and $7.7 million, respectively at December 31, 2019. Commitments to extend
credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire
unexercised, the total commitment amounts do not necessarily represent future cash requirements. Oriental evaluates each customer’s
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Oriental upon extension of
credit, is based on management’s credit evaluation of the customer. Loans sold with recourse at December 31, 2019 and 2018
amounted to $147.4 million and $5.4 million, respectively. The increase was mainly from the Scotiabank PR & USVI Acquisition.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been
prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such
prices are affected by inflation.
74
QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations:
TABLE 17 — SELECTED QUARTERLY FINANCIAL DATA:
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision
for loan
and lease losses
Non-interest income
Non-interest expenses
Income before taxes
Income tax expense
Net income
Less: dividends on preferred stock
Income available to common
shareholders
PER SHARE DATA:
Basic
Diluted
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision
for loan
and lease losses
Non-interest income
Non-interest expenses
(Loss) income before taxes
Income tax expense (benefit)
Net (loss) income
Less: dividends on preferred stock
(Loss) income available to common
shareholders
PER SHARE DATA:
Basic
Diluted
$
$
$
$
$
$
$
$
March 31,
2019
94,710 $
12,921
81,789
12,249
69,540
17,656
52,152
35,044
11,574
23,470
(1,628)
December 31,
2019
June 30,
2019
September 30,
2019
(In thousands, except per share data)
94,255 $
13,170
81,085
17,705
93,655 $
12,945
80,710
43,770
63,380
22,948
51,452
34,876
10,897
23,979
(1,628)
36,940
22,178
50,727
8,391
1,008
7,383
(1,628)
Total
2019
373,795
51,002
322,793
96,792
226,001
82,493
233,244
75,250
21,409
53,841
(6,512)
91,175 $
11,966
79,209
23,068
56,141
19,711
78,913
(3,061)
(2,070)
(991)
(1,628)
21,842 $
22,351 $
5,755 $
(2,619) $
47,329
0.43 $
0.42 $
0.44 $
0.43 $
0.11 $
0.11 $
(0.05) $
(0.05) $
0.92
0.92
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
Total
2018
(In thousands, except per share data)
83,170 $
9,176
73,994
15,460
58,534
18,514
52,121
24,927
8,010
16,917
(3,465)
88,006 $
10,418
77,588
14,747
62,841
18,703
52,300
29,244
9,595
19,649
(3,465)
94,137 $
11,860
82,277
14,601
67,676
18,620
50,941
35,355
12,255
23,100
(3,466)
95,106 $
13,071
82,035
11,300
70,735
24,258
51,719
43,274
18,530
24,744
(1,628)
360,419
44,525
315,894
56,108
259,786
80,095
207,081
132,800
48,390
84,410
(12,024)
13,452 $
16,184 $
19,634 $
23,116 $
72,386
0.31 $
0.30 $
0.36 $
0.35 $
0.45 $
0.42 $
0.47 $
0.45 $
1.59
1.52
75
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Background
Oriental’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through
the adoption of a risk management program, which is overseen and monitored by the Chief Risk and Compliance Officer, the Board’s
Risk and Compliance Committee and the executive Risk and Compliance Team. Oriental has continued to refine and enhance its risk
management program by strengthening policies, processes and procedures necessary to maintain effective risk management.
All aspects of Oriental’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to
risk management. As more fully discussed below, Oriental’s primary risk exposures include, market, interest rate, credit, liquidity,
operational and concentration risks.
Market Risk
Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices.
Oriental evaluates market risk together with interest rate risk. Oriental’s financial results and capital levels are constantly exposed to
market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by Oriental complies
with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the
Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and
finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by Oriental is within the parameters established
in such policies.
Interest Rate Risk
Interest rate risk is the exposure of Oriental’s earnings or capital to adverse movements in interest rates. It is a predominant market
risk in terms of its potential impact on earnings. Oriental manages its asset/liability position in order to limit the effects of changes in
interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.
In executing its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and
prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the
investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and
any tax or regulatory issues which may be pertinent to these areas.
On a quarterly basis, Oriental performs a net interest income simulation analysis on a consolidated basis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon,
assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous
interest rate movements are also modeled. Simulations are carried out in two ways:
(i) using a static balance sheet as Oriental had on the simulation date, and
(ii) using a dynamic balance sheet based on recent organic growth patterns and core business strategies.
The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest
yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future
funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may
be important in projecting the future growth of net interest income.
Oriental uses a software application to project future movements in Oriental’s balance sheet and income statement. The starting point
of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.
76
These simulations are complex and use many assumptions that are intended to reflect the general behavior of Oriental over the period
in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these
simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following
table presents the results of the simulations at December 31, 2019 for the most likely scenario, assuming a one-year time horizon:
Change in interest rate
+ 200 Basis points
+ 100 Basis points
- 100 Basis points
- 200 Basis points
Net Interest Income Risk (one-year projection)
Static Balance Sheet
Growing Simulation
Amount
Percent
Amount
Percent
Change
Change
Change
Change
(Dollars in thousands)
$
$
$
$
20,415
10,935
(12,085)
(23,052)
4.63% $
2.48% $
-2.74% $
-5.22% $
21,593
11,573
(12,742)
(24,291)
4.71%
2.52%
-2.78%
-5.29%
Future net interest income could be affected by Oriental’s investments in callable securities, prepayment risk related to mortgage loans
and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter
into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of Oriental’s assets and
liabilities, Oriental has executed certain transactions which include extending the maturity and the re-pricing frequency of the
liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to
hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-
NY as of December 31, 2019.
Oriental maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate
sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest
margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged
fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of
this variability in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are
linked to the forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a
prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue
risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset
by Oriental’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of
interest rate fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities,
respectively, will increase or decrease.
Derivative instruments that are used as part of Oriental’s interest risk management strategy include interest rate swaps, forward-
settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and
liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based
on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or
sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the
option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some
purchased option contracts give Oriental the right to enter into interest rate swaps and cap and floor agreements with the writer of the
option. In addition, Oriental enters into certain transactions that contain embedded derivatives. When the embedded derivative
possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is
bifurcated and carried at fair value.
Following is a summary of certain strategies, including derivative activities, currently used by Oriental to manage interest rate risk:
77
Interest rate swaps — Oriental entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted
wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowing transactions
occurred, the interest rate swap effectively fixes Oriental’s interest payments on an amount of forecasted interest expense attributable
to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative liability of $907 thousand (notional amount
of $32.0 million) was recognized at December 31, 2019 related to the valuation of these swaps.
In addition, Oriental has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are
utilized to convert certain variable-rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which Oriental
enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are
marked to market through earnings. At December 31, 2019, Oriental did not have interest rate swaps offered to clients not designated
as hedging instruments.
Wholesale borrowings — Oriental uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the
FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix Oriental’s interest payments on these
borrowings. As of December 31, 2019, Oriental had $32.0 million in interest rate swaps at an average rate of 2.42% designated as cash
flow hedges for $32.0 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis.
Credit Risk
Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in
accordance with its terms. The principal source of credit risk for Oriental is its lending activities. In Puerto Rico, Oriental’s principal
market, economic conditions are very challenging, as they have been for the last twelve years, due to a shrinking population, a
protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis,
and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico
government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board
for Puerto Rico. In addition, as was demonstrated with January 2020 earthquakes and with hurricanes Irma and Maria during the
month of September 2017, Puerto Rico is susceptible to natural disasters, such as hurricanes and earthquakes, which can have a
disproportionate impact on Puerto Rico because of the logistical difficulties of bringing relief to an island far from the United States
mainland. Moreover, the Puerto Rico government's fiscal challenges and Puerto Rico's unique relationship with the United States also
complicate any relief efforts after a natural disaster. These events increase credit risk as debtors may no longer be capable of operating
their businesses and the collateral securing Oriental's loans may suffer significant damages.
Oriental manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring
and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. Oriental also employs
proactive collection and loss mitigation practices.
Oriental may also encounter risk of default in relation to its securities portfolio. The securities held by Oriental are all agency
mortgage-backed securities. Thus, these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full
faith and credit of the U.S. government.
Oriental’s executive Credit Risk Team, composed of its Chief Operating Officer, Chief Risk and Compliance Officer, and other senior
executives, has primary responsibility for setting strategies to achieve Oriental’s credit risk goals and objectives. Those goals and
objectives are set forth in Oriental’s Credit Policy as approved by the Board.
Liquidity Risk
Liquidity risk is the risk of Oriental not being able to generate sufficient cash from either assets or liabilities to meet obligations as
they become due without incurring substantial losses. The Board has established a policy to manage this risk. Oriental’s cash
requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and
funding of new and existing investments as required.
78
Oriental’s business requires continuous access to various funding sources. While Oriental is able to fund its operations through
deposits as well as through advances from the FHLB-NY and other alternative sources, Oriental’s business is dependent upon other
external wholesale funding sources. Oriental has selectively reduced its use of certain wholesale funding sources, such as repurchase
agreements and brokered deposits. As of December 31, 2019, Oriental had $190.0 million in repurchase agreements, excluding
accrued interest, and $243.5 million in brokered deposits.
Brokered deposits are typically offered through an intermediary to small retail investors. Oriental’s ability to continue to attract
brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities
markets, Oriental’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are
generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered
deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based
on small differences in interest rates offered on deposits.
Although Oriental expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such
financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative
developments occur with respect to Oriental, the availability and cost of Oriental’s funding sources could be adversely affected. In that
event, Oriental’s cost of funds may increase, thereby reducing its net interest income, or Oriental may need to dispose of a portion of
its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse
accounting consequences upon any such dispositions. Oriental’s efforts to monitor and manage liquidity risk may not be successful to
deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by Oriental or
market-related events. In the event that such sources of funds are reduced or eliminated, and Oriental is not able to replace these on a
cost-effective basis, Oriental may be forced to curtail or cease its loan origination business and treasury activities, which would have a
material adverse effect on its operations and financial condition.
As of December 31, 2019, Oriental had approximately $851.3 million in unrestricted cash and cash equivalents, $675.5 million in
investment securities that are not pledged as collateral, and $983.0 million in borrowing capacity at the FHLB-NY.
Operational Risk
Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All
functions, products and services of Oriental are susceptible to operational risk.
Oriental faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and
financial products and services. Coupled with external influences such as the risk of natural disasters, market conditions, security
risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk,
Oriental has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and
manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide
reasonable assurance that Oriental’s business operations are functioning within established limits.
Oriental classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For
business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and
assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, Oriental has
specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology,
Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices
specific to the needs of the business groups. All these matters are reviewed and discussed in the executive Risk and Compliance Team.
Oriental also has a Business Continuity Plan to address situations where its capacity to perform critical functions is affected. Under
such circumstances, a Crisis Management Team is activated to restore such critical functions within established timeframes.
Oriental is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly
increasing over the last several years. Oriental has established and continues to enhance procedures based on legal and regulatory
requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. Oriental has
a corporate compliance function headed by a Chief Risk and Compliance Officer who reports to the Chief Executive Officer and
supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and Compliance Officer is responsible for the
oversight of regulatory compliance and implementation of a company-wide compliance program, including the Bank Secrecy
Act/Anti-Money Laundering compliance program.
79
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.
80
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, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019,
2018, and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
Notes to the Consolidated Financial Statements
Note 1– Summary of Significant Accounting Policies
Note 2 – Business Combination
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 – Core deposit, customer relationship intangible and other intangibles
Note 14 – Accrued Interest Receivable and Other Assets
Note 15 – Deposits and Related Interest
Note 16 – Borrowings and Related Interest
Note 17 – Offsetting of Financial Assets and Liabilities
Note 18– Employee Benefit Plan
Note 19 – Related Party Transactions
Note 20 – Income Taxes
Note 21 – Regulatory Capital Requirements
Note 22 – Equity- Based Compensation Plan
Note 23 – Stockholders’ Equity
Note 24 – Accumulated Other Comprehensive Income
Note 25 – Earnings per Common Share
Note 26 – Guarantees
Note 27 – Commitments and Contingencies
Note 28 – Operating Leases
Note 29 – Fair Value of Financial Instruments
Note 30 – Banking and Financial Service Revenues
Note 31 – Business Segments
Note 32 – OFG Bancorp (Holding Company Only) Financial Information
Note 33 – Subsequent Events
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OFG Bancorp
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and stockholders of OFG Bancorp:
The management of OFG Bancorp ("Oriental") is responsible for establishing and maintaining effective internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of internal
control over financial reporting. Oriental’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America.
Oriental’s internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Oriental;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures
of Oriental are being made only in accordance with authorization of management and directors of Oriental; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of Oriental’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of Oriental’s internal
control over financial reporting as of December 31, 2019. Management made its assessment using the criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Criteria”).
On December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”),
U.S. Virgin Islands banking operations of BNS, and certain loans from BNS’s Puerto Rico branch, all collectively referred to as the
“Scotiabank PR & USVI Acquisition”. As allowed by guidance of the Securities and Exchange Commission, management excluded
from its assessment of the effectiveness of Oriental's internal control over financial reporting as of December 31, 2019, Scotiabank PR
& USVI with total assets of $3.6 billion and liabilities of $3.1 billion, included in Oriental’s consolidated financial statements as of
December 31, 2019.
Based on its assessment, management has concluded that Oriental maintained effective internal control over financial reporting as of
December 31, 2019 based on the COSO Criteria.
The effectiveness of Oriental’s internal control over financial reporting as of December 31, 2019, has been audited by KPMG LLP,
Oriental’s independent registered public accounting firm, as stated in their report dated March 2, 2020.
By: /s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
Date: March 2, 2020
By: /s/ Maritza Arizmendi
Maritza Arizmendi
Executive Vice President and Chief Financial Officer
Date: March 2, 2020
82
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on the Consolidated Financial Statements
We have audited the consolidated financial statements and the related notes (collectively, the consolidated financial statements) of
OFG Bancorp and subsidiaries (the Company) as of December 31, 2019 and 2018, as listed in the accompanying index. In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2019 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the allowance for loan and lease losses related to originated loans collectively evaluated for impairment
As discussed in Notes 1 and 7 to the consolidated financial statements, the Company’s allowance for loan and lease losses related to
originated loans collectively evaluated for impairment (ALLL) was $68.4 million of a total allowance and loan and lease losses of
$116.5 million as of December 31, 2019. The ALLL estimate consists of both quantitative and qualitative loss components. The
Company estimates the quantitative component of the ALLL for the commercial, consumer, and auto loan and leasing portfolio
segments by applying loss factors that are developed considering the Company’s historical loss experience over a look back period
as adjusted for an estimated loss emergence period. For the commercial loan segment these are also based on assigned loan grades.
For the residential mortgage loan portfolio the methodology incorporates probability of default (PD) and loss given default (LGD)
assumptions to determine the applicable loss factors. Qualitative adjustments to such loss factors are made when internal and
external factors are identified that are not taken into account by the quantitative component of the ALLL.
83
We identified the assessment of the ALLL as a critical audit matter because it involved significant measurement uncertainty
requiring complex auditor judgment, and knowledge and experience in the industry. Specifically, complex and subjective auditor
judgment was required to assess the (1) methodologies and data used to derive the quantitative loss factors, (2) key assumptions
including how loans with similar risk characteristics are segmented, the historical look back periods and the loss emergence periods,
(3) loan grades assigned to commercial loans, and (4) development and evaluation of qualitative adjustments.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls
over the Company’s ALLL process, including controls related to the (1) development of the ALLL methodology, (2) determination
of the key factors and assumptions used to estimate the loss factors, (3) periodic testing of commercial loan grades, (4)
determination of the qualitative adjustments, and (5) analysis of the ALLL results, trends and ratios. We evaluated the pooling of
loans with similar risk characteristics, including loan mix and levels of delinquencies, non-performing loans, and net charge-offs.
We tested the relevance of sources of internal and external data and key assumptions, including the historical look back periods, by
evaluating (1) if loss data in the historical look back period was representative of the credit characteristics of the current portfolio,
and (2) the sufficiency of loss data within the historical look back period. We assessed the appropriateness of the loss emergence
period assumptions by considering the Company’s credit risk policies and observable loss data.
In addition, we involved credit risk professionals with specialized industry knowledge and experience who assisted in evaluating:
−
−
−
−
the Company’s ALLL methodology for compliance with U.S. generally accepted accounting principles,
the resulting quantitative loss factors, including key assumptions,
the appropriateness of loan portfolio segmentation,
the framework used to develop the resulting qualitative factors and the effect of those factors on the ALLL compared with
relevant credit risk factors and credit trends, and
−
individual loan grades for a selection of commercial loans.
Assessment of the allowance for loan losses and interest income related to the acquired loan portfolios
As discussed in Notes 1, 6 and 7 to the consolidated financial statements, the Company accounts for certain acquired loans with
evidence of deterioration in credit quality since origination (purchased credit impaired or PCI loans) under FASB ASC Topic 310-
30 (ASC 310-30). The Company’s allowance for loan losses related to PCI loans (the ASC 310-30 ALL) was $31.5 million of the
total allowance of loan and lease losses of $116.5 million as of December 31, 2019. Interest income on PCI loans amounted to
$45.1 million during the year ended December 31, 2019, excluding the acquired loans from the Scotiabank & USVI acquisition.
The Company’s PCI loans predominantly consist of pools of commercial and mortgage loans. The recognition of the ASC 310-30
ALL and interest income on the PCI loans is dependent on having a reasonable expectation about the timing and amount of cash
flows expected to be collected from scheduled customer repayments, collateral values, foreclosures or other collection efforts. The
Company’s determines cash flows expected to be collected from PCI loans using assumptions including probability of default (PD),
loss severity, assigned loan grades for commercial loans, and prepayment rates for mortgage loans. The Company performs a
quarterly evaluation of actual versus expected cash flows and assesses the credit quality of these loans based on delinquency,
severity factors and loan grades on commercial loans.
We identified the assessment of the ASC 310-30 ALL and interest income on PCI loans as a critical audit matter because it involved
significant measurement uncertainty requiring complex auditor judgment. Specifically, complex and subjective auditor judgement
was required to assess the (1) methodology to derive the expected cash flows, and (2) key assumptions including the PD, loss
severity and assigned loan grades for commercial loans.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls
over the Company’s ASC 310-30 ALL process and the process for recognizing interest income on PCI loans, including controls
related to the (1) development of the ASC 310-30 methodology, (2) determination of key assumptions used to develop the cash
flows expected to be collected, and (3) measurement of the ASC 310-30 ALL estimate and interest income on PCI loans. We tested
the relevance and reliability of inputs and key assumptions, including the PD and loss severity assumptions, loan grades on
commercial loans and whether additional factors and alternative assumptions should be used.
84
In addition, we involved credit risk professionals with specialized industry knowledge and experience who assisted in evaluating:
−
the Company’s ASC 310-30 methodology for compliance with U.S. generally accepted accounting principles,
−
for a selection of pools, the Company’s cash flow backtesting results, and the benchmarking of expected cash flows
developed by the Company against expected cash flows developed by an external specialist, and
−
the individual loan grades for a selection of commercial loans.
Assessment of the fair value measurements of acquired loans and core deposit intangibles in the Scotiabank & USVI Acquisition
As discussed in Note 2 to the consolidated financial statements, on December 31, 2019, the Company completed the acquisition of
Scotiabank de Puerto Rico (SBPR) and certain assets and liabilities of The Bank of Nova Scotia – Puerto Rico Branch and The
Bank of Nova Scotia – Virgin Islands Branch (the “Scotiabank PR & USVI Acquisition”). The acquisition was accounted for as a
business combination using the acquisition method of accounting. Accordingly, assets acquired, liabilities assumed and
consideration paid were recorded at their estimated fair values at the acquisition date. The acquisition date fair value of the acquired
loans was $2.2 billion, primarily consisting of loans valued in loan pools (acquired loan pools) and the acquisition date fair value of
the core deposit intangible (CDI) was $41.5 million. The fair value of acquired loans was based on the income approach utilizing a
discounted cash flow methodology that used projections of interest and principal payments based on loan contractual terms, and
applying certain valuation assumptions, including probability of default rates, loss severity, discount rates, and prepayment rates.
The fair value of the CDI was estimated by projecting net cash flow benefits, including assumptions related to customer attrition
rates, discount rate, and alternative costs of funds.
We identified the assessment of the fair value measurements of acquired loan pool and CDI acquired as part of the Scotiabank PR &
USVI Acquisition as a critical audit matter. The assessment encompassed the evaluation of the fair value methodologies for
acquired loan pools and CDI, including the assumptions used in the fair value estimates. The valuation assumptions for acquired
loan pools related to probability of default rates, loss severity and discount rates, and the valuation assumptions for the CDI related
to discount rate and alternative cost of funds rate. These assumptions involved significant measurement uncertainty and required
specialized skills and knowledge to evaluate. Additionally, there was auditor judgment involved in designing and performing audit
procedures in order to evaluate and test these key assumptions.
85
The primary procedures we performed to address the critical audit matter included testing certain internal controls over the (1)
development of the fair value methodologies, (2) determination of the key assumptions for acquired loan pools and CDI and (3)
analysis of the fair value measurement results. We involved valuation professionals with specialized skills and knowledge, who
assisted in:
−
evaluating the valuation methodologies for compliance with U.S. generally accepted accounting principles,
− developing an estimate of fair value for a selection of acquired loan pools using the loan contractual terms and independently
developed assumptions used by other market participants, and compared the results to the Company’s estimate of fair value,
−
evaluating the CDI valuation assumptions by comparing those assumptions it against publicly available market data used by
other market participants, and
− developing an estimate of the fair value for the CDI using the Company’s cash flow assumptions and independently
developed assumptions used by other market participants and compared the results to the Company’s estimate of fair value.
/s/ KPMG LLP
San Juan, Puerto Rico
March 2, 2020
We have served as the Company’s auditor since 2005.
Stamp No. E392164 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
86
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on Internal Control Over Financial Reporting
We have audited OFG Bancorp and subsidiaries (the Company) internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our
report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired from The Bank of Nova Scotia (BNS) all outstanding common stock of Scotiabank de Puerto Rico, the U.S.
Virgin Island banking operations of BNS, and certain loans and liabilities from BNS’s Puerto Rico branch (collectively, “Scotiabank
PR & USVI). Management excluded from its assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2019, Scotiabank PR & USVI’s internal control over financial reporting associated with total assets of
$3.5 billion and total liabilities of $$3.1 billion included in the consolidated financial statements of the Company as of December 31,
2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over
financial reporting of Scotiabank PR & USVI.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
87
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
San Juan, Puerto Rico
March 2, 2020
Stamp No. E392163 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report
88
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2019 AND 2018
$
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 $182 (December 31, 2018 - $647)
Investment securities available-for-sale, at fair value, with amortized cost of $1,074,475
(December 31, 2018 - $854,511)
Investment securities held-to-maturity, at amortized cost, with fair value of $410,353 at
December 31, 2018
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 losses of $116,539 (December 31,
2018 - $164,231)
Total loans
Other assets:
Foreclosed real estate
Accrued interest receivable
Deferred tax asset, net
Premises and equipment, net
Customers' liability on acceptances
Core deposit, customer relationship and other intangibles
Servicing assets
Derivative assets
Goodwill
Operating lease right-of-use assets
Other assets
December 31,
2019
2018
(In thousands)
$
844,532
6,775
851,307
1,450
442,103
4,930
447,033
3,030
37
360
1,074,169
841,857
-
13,048
560
1,087,814
424,740
12,644
3
1,279,604
19,591
10,368
6,622,256
6,641,847
4,421,226
4,431,594
29,909
37,120
176,740
81,105
21,599
56,965
50,779
6
86,069
39,112
135,839
33,768
34,254
113,763
68,892
16,937
3,369
10,716
347
86,069
-
53,976
Total assets
$
9,297,661
$ 6,583,352
The accompanying notes are an integral part of these consolidated financial statements
89
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2019 AND 2018 (CONTINUED)
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
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (See Note 18)
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000
shares of Series D issued and outstanding
(December 31, 2018 - 1,340,000 shares; 1,380,000 shares; and 960,000
shares) $25 liquidation value
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares
issued: 51,398,956 shares outstanding (December 31, 2018 - $59,885,234;
51,293,924)
Additional paid-in capital
Legal surplus
Retained earnings
Treasury stock, at cost, 8,486,278 shares (December 31, 2018 - 8,591,310 shares)
Accumulated other comprehensive loss, net of tax of $206 (December 31, 2018 - $1,677)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
(In thousands)
$
$
3,579,115
1,836,480
2,283,015
7,698,610
2,191,802
1,212,259
1,504,054
4,908,115
190,274
78,009
36,083
1,195
305,561
913
21,599
39,840
185,660
8,252,183
455,508
77,620
36,083
1,214
570,425
333
16,937
-
87,665
5,583,475
92,000
92,000
59,885
621,515
95,779
279,646
(102,339)
(1,008)
1,045,478
9,297,661
59,885
619,381
90,167
253,040
(103,633)
(10,963)
999,877
6,583,352
The accompanying notes are an integral part of these consolidated financial statements
90
OFG BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
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 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
Year Ended December 31,
2019
2017
2018
(In thousands, except per share data)
$
339,875 $
19,854
14,066
373,795
321,381 $
31,190
7,848
360,419
39,355
7,423
2,212
2,012
51,002
322,793
96,792
226,001
42,866
26,224
4,275
73,365
32,953
7,794
1,875
1,903
44,525
315,894
56,108
259,786
43,638
25,934
4,767
74,339
312,421
26,994
6,232
345,647
30,298
7,223
2,398
1,556
41,475
304,172
113,139
191,033
39,468
25,790
4,050
69,308
FDIC shared-loss benefit, net
-
-
1,403
Net gain on:
Sale of securities
Derivatives
Early extinguishment of debt
Bargain purchase from Scotiabank PR & USVI acquisition
Other non-interest income
Total non-interest income, net
8,274
-
(7)
315
546
82,493
-
-
-
-
5,756
80,095
6,896
132
(80)
-
1,028
78,687
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, 2019, 2018 AND 2017 (CONTINUED)
Non-interest expense:
Compensation and employee benefits
Occupancy, equipment and infrastructure costs
Merger and restructuring charges
Electronic banking charges
Professional and service fees
Loss on sale of foreclosed real estate, other repossessed assets and credit
related expenses
Information technology expenses
Taxes, other than payroll and income taxes
Advertising, business promotion, and strategic initiatives
Loan servicing and clearing expenses
Communication
Insurance
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 available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding and equivalents
Cash dividends per share of common stock
$
$
$
$
Year Ended December 31,
2019
2017
2018
(In thousands, except per share data)
82,533
30,052
24,054
21,244
14,629
11,498
9,865
8,749
5,208
4,853
3,315
3,309
2,468
1,216
10,251
233,244
75,250
21,409
53,841
(6,512)
47,329 $
0.92 $
0.92 $
51,719
0.28 $
76,524
33,084
-
21,234
12,442
13,552
8,227
9,017
5,084
4,810
3,447
6,249
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
12,626
8,010
9,187
5,616
4,693
3,415
5,223
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
The accompanying notes are an integral part of these consolidated financial statements
92
OFG BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
Net income
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale
Realized gain on sale of securities available-for-sale
Unrealized (loss) gain on cash flow hedges
Other comprehensive income (loss) before taxes
Income tax effect
Other comprehensive income (loss) after taxes
Comprehensive income
2019
Year Ended December 31,
2018
(In thousands)
2017
$
53,841 $
84,410 $
52,646
20,622
(8,274)
(921)
11,427
(1,472)
9,955
63,796 $
(9,651)
-
524
(9,127)
1,113
(8,014)
76,396 $
2,276
(6,896)
494
(4,126)
(419)
(4,545)
48,101
$
The accompanying notes are an integral part of these consolidated financial statements
93
OFG BANCORP
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
Preferred stock:
Balance at beginning of year
Conversion of convertible preferred stock to common stock
Balance at end of year
Common stock:
Balance at beginning of year
Conversion of convertible preferred stock to common stock
Balance at end of year
Additional paid-in capital:
Balance at beginning of year
Stock-based compensation expense
Stock-based compensation excess tax benefit recognized in income
Lapsed restricted stock units
Conversion of convertible preferred stock to 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
Topic 842 adoption
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 and options
Balance at end of year
Accumulated other comprehensive loss, net of tax:
Balance at beginning of year
Other comprehensive income (loss), net of tax:
Balance at end of year
Total stockholders’ equity
2019
Year Ended December 31,
2018
(In thousands)
2017
$
92,000 $
-
92,000
176,000 $
(84,000)
92,000
59,885
-
59,885
619,381
2,134
-
-
-
621,515
90,167
5,612
95,779
253,040
(736)
53,841
(14,375)
(6,512)
(5,612)
279,646
52,626
7,259
59,885
541,600
1,401
-
(361)
76,741
619,381
81,454
8,713
90,167
200,878
-
84,410
(11,511)
(12,024)
(8,713)
253,040
(103,633)
1,294
(102,339)
(104,502)
869
(103,633)
(10,963)
9,955
(1,008)
1,045,478 $
$
(2,949)
(8,014)
(10,963)
999,877 $
176,000
-
176,000
52,626
-
52,626
540,948
1,109
(99)
(358)
-
541,600
76,293
5,161
81,454
177,808
-
52,646
(10,553)
(13,862)
(5,161)
200,878
(104,860)
358
(104,502)
1,596
(4,545)
(2,949)
945,107
The accompanying notes are an integral part of these consolidated financial statements
94
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
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
Net change in operating leases
FDIC shared-loss benefit
Depreciation and amortization of premises and equipment
Deferred income tax (benefit) expense, net
Provision for loan losses, net
Stock-based compensation
Stock-based compensation excess tax benefit recognized in income
Bargain purchase from Scotiabank PR & USVI acquisition
(Gain) loss on:
Sale of securities
Sale of loans
Derivatives
Early extinguishment of debt
Foreclosed real estate and other repossessed assets
Sale of other 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 increase (decrease) in:
Accrued interest on deposits and borrowings
Accrued expenses and other liabilities
Net cash provided by operating activities
2019
Year Ended December 31,
2018
(In thousands)
2017
$
53,841 $
84,410 $
52,646
4,624
4,605
3,537
4,956
1,170
(75)
-
8,513
(4,068)
96,792
2,134
-
(315)
(8,274)
(524)
-
7
3,145
(187)
(82,111)
48,991
323
1,904
401
(1,957)
8,088
(27,761)
109,617
5,753
1,319
-
-
8,898
14,772
56,108
1,401
-
-
-
(301)
-
-
4,662
(107)
(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)
-
(6,896)
(955)
(103)
80
5,021
(539)
(116,020)
75,637
156
(29,742)
37
13,675
(937)
28,431
151,440
The accompanying notes are an integral part of these consolidated financial statements
95
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 (CONTINUED)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale
FHLB stock
Other investments
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
Fully charged-off loans
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
Outlays for business acquisitions
Cash and cash equivalents received in Scotiabank PR & USVI Acquisition
Net cash provided by (used in) 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
Exercise of stock options with treasury shares
Dividends paid on preferred stock
Dividends paid on common stock
Net cash (used in) provided by financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Reconciliation of the Consolidated Statements of Cash Flows to the
Consolidated Balance Sheets:
Cash and due from banks
Money market investments
Restricted cash
Total cash, cash equivalents, restricted cash and restricted cash equivalents
at end of period
$
$
$
$
$
Year Ended December 31,
2018
2019
2017
(In thousands)
(1,734)
(1,167)
(467)
165,683
-
3,332
(271,639)
(113,731)
-
120,709
77,583
115,082
680,466
51,481
2,382
2,225
(1,217,137)
1,102,805
-
(12,966)
(425,242)
492,512
842,173 $
17,837
51,057
-
1,668
(1,315,906)
840,064
-
(11,491)
-
-
(488,767) $
(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
(265,162)
(264,730)
386
1,294
(6,509)
(14,375)
(549,096) $
402,694
450,063
852,757 $
100,147
262,223
(20,816)
508
(12,024)
(12,796)
317,242 $
(38,170)
488,233
450,063 $
125,991
(459,815)
(5,741)
-
(13,862)
(10,553)
(363,980)
(25,236)
513,469
488,233
844,532 $
6,775
1,450
442,103 $
4,930
3,030
478,182
7,021
3,030
852,757 $
450,063 $
488,233
96
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017 (CONTINUED)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
$
Interest paid
$
Income taxes paid
$
Operating lease liabilities paid
$
Mortgage loans securitized into mortgage-backed securities
$
Transfer from held-to-maturity securities to available-for-sale 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 to common stock
$
Financed sales of foreclosed real estate
$
Loans booked under the GNMA buy-back option
$
Cash consideration payable
$
Interest capitalized on loans subject to the temporary payment moratorium
$
Initial recognition of operating lease right-of-use assets
$
Initial recognition of operating lease liabilities
41,310 $
39,375 $
6,873 $
62,764 $
424,740 $
43,915 $
27,775 $
49 $
- $
1,091 $
75,181 $
5,195 $
- $
21,930 $
23,689 $
The accompanying notes are an integral part of these consolidated financial statements
41,318 $
17,778 $
- $
74,630 $
- $
47,084 $
5,795 $
1,247 $
84,000 $
2,333 $
13,325 $
- $
- $
- $
- $
40,570
30
-
74,919
-
43,163
33,647
293
-
1,113
8,268
-
39,701
-
-
97
OFG BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of OFG Bancorp (Oriental) conform with GAAP and to banking industry practices. The following is a
description of Oriental’s most significant accounting policies:
Nature of Operations
Oriental is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. Oriental
operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental
Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), and a
retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). Oriental also has a special purpose entity, Oriental
Financial (PR) Statutory Trust II (the “Statutory Trust II”). OFG Ventures LLC (“OFG Ventures”), a limited liability corporation, is
also a subsidiary of Oriental. Through these subsidiaries and their respective divisions, Oriental provides a wide range of banking and
financial services such as commercial, consumer and mortgage lending, leasing, auto loans, financial planning, insurance sales, money
management and investment banking and brokerage services, as well as corporate and individual trust services.
The main offices of Oriental and most of its subsidiaries are located in San Juan, Puerto Rico with two branches in the US Virgin
Islands. OPC is located in Boca Raton, Florida, and OFG USA is based in Cornelius, North Carolina. Oriental is subject to supervision
and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the U.S. Bank Holding
Company Act of 1956, as amended, and the Dodd-Frank Act.
The Bank is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of
Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers banking services such as
commercial and consumer lending, leasing, auto loans, savings and time deposit products, financial planning, and corporate and
individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. The
Bank has an operating subsidiary, OFG USA, which is a commercial lender organized in Delaware and based in Cornelius, North
Carolina. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas and Oriental
International, two divisions of the Bank, are international banking entities licensed pursuant to the International Banking Center
Regulatory Act of Puerto Rico, as amended. OIB, Oriental Overseas, and Oriental International offer the Bank certain Puerto Rico tax
advantages. Their activities are limited under Puerto Rico law to persons located in Puerto Rico with assets/liabilities located outside
of Puerto Rico. The Bank’s USVI operations are also subject to the supervision, examination and regulation of the US Virgin Islands
Banking Board.
Oriental Financial Services is a securities broker-dealer and is subject to the supervision, examination and regulation of the Financial
Industry Regulatory Authority (“FINRA”), the SEC, and the OCFI. Oriental Financial Services is also a member of the Securities
Investor Protection Corporation. Oriental Insurance is an insurance agency and is subject to the supervision, examination and
regulation of the Office of the Commissioner of Insurance of Puerto Rico.
Oriental’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, the sale of loans directly in the secondary market or the securitization of
conforming loans into mortgage-backed securities, and the purchase or assumption of the right to service loans originated by others.
The Bank originates Federal Housing Administration (“FHA”) insured and Veterans Administration (“VA”) guaranteed mortgages
that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities
which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting
requirements for sale or exchange under certain Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage
Corporation (“FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or
FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA and FHLMC mortgage loans for issuance of FNMA
and FHLMC mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed securities. The Bank is the
master servicer of the GNMA, FNMA and FHLMC pools that it issues and of its mortgage loan portfolio and has a subservicing
arrangement with a third party for a portion of its acquired loan portfolio. During 2016, Oriental began servicing most of its mortgage
loan portfolio.
On December 18, 2012, Oriental purchased from Banco Bilbao Vizcaya Argentaria, S. A. (“BBVA”), all of the outstanding common
stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya Argentaria
Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), a subsidiary
offering insurance services, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA Securities”), a registered broker-dealer. This
98
OFG BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
transaction is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank, BBVA Seguros and BBVA
Securities are collectively referred to as the “BBVAPR Companies” or “BBVAPR.”
On December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”) for
an aggregate purchase price of $550 million. Immediately following the closing of the Scotiabank Acquisition, Oriental merged
Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this
transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets
and an assumption of certain liabilities for their net book value plus a $10 million premium on deposits, which were settled as part of
the final consideration from the acquisition. In addition, Oriental acquired certain loans and assumed certain liabilities, from BNS’s
Puerto Rico branch for their net book value which were settled as part of the final consideration from the acquisition. This transaction
is referred to as the “Scotiabank PR & USVI Acquisition”.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OFG Bancorp and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation. The Statutory Trust II is exempt from the consolidation
requirements of GAAP.
Business Combinations
Oriental accounted for the Scotiabank PR & USVI Acquisition, BBVAPR Acquisition and the FDIC-assisted acquisition of Eurobank
under the accounting guidance of ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of
accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan losses related to
the acquired loans was recorded on the acquisition date. Loans acquired were recorded at fair value in accordance with the fair value
methodology prescribed in ASC Topic 820. These fair value estimates associated with the loans included estimates related to expected
prepayments and the amount and timing of expected principal, interest and other cash flows. The initial valuation of these loans
required management to make subjective judgments concerning estimates about how the acquired loans would perform in the future
using valuation methods, including discounted cash flow analyses. Factors that may significantly affect the initial valuation include,
among others, market-based and industry data related to expected changes in interest rates, assumptions related to probability and
severity of credit losses, estimated timing of credit losses including the timing of foreclosure and liquidation of collateral, expected
prepayment rates, the specific terms and provisions of any shared-loss agreements, and specific industry and market conditions that
may impact independent third-party appraisals.
The fair values initially assigned to assets acquired and liabilities assumed are preliminary and subject to refinement for up to one year
after the closing date of the acquisition as new information relative to closing date fair values becomes available.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to
the determination of the allowance for loan and lease losses, the valuation of securities, revisions to expected cash flows in acquired
loans, the determination of income taxes, other-than-temporary impairment of securities, and goodwill valuation and impairment
assessment.
Cash Equivalents
Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or
less.
99
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Earnings per Common Share
Basic earnings per share is calculated by dividing income available to common shareholders (net income reduced by dividends on
preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of
basic earnings per share except that the weighted average of common shares is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common shares underlying stock options and restricted units had
been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock
splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements.
Securities Purchased/Sold Under Agreements to Resell/Repurchase
Oriental purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements
represent short-term loans and are reflected as assets in the consolidated statements of financial condition. It is Oriental’s policy to
take possession of securities purchased under resale agreements while the counterparty retains effective control over the securities.
Oriental monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and
requests additional collateral when deemed appropriate.
Oriental also sells securities under agreements to repurchase the same or similar securities. Oriental retains effective control over the
securities sold under these agreements. Accordingly, such agreements are treated as financing arrangements, and the obligations to
repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the
asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral.
Investment Securities
Securities are classified as held-to-maturity, available-for-sale or trading. Securities for which Oriental has the intent and ability to
hold until maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity
because of interest rate changes to meet liquidity needs or to better match the repricing characteristics of funding sources are classified
as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported
net of tax in other comprehensive income (loss).
Oriental classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future.
These securities are carried at fair value with realized and unrealized changes in fair value included in earnings in the period in which
the changes occur.
Oriental’s investment in the Federal Home Loan Bank of New York (“FHLB-NY”) stock, a restricted security, has no readily
determinable fair value and can only be sold back to the FHLB-NY at cost. Therefore, these stock shares are deemed to be
nonmarketable equity securities and are carried at cost.
Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized
gains or losses on sales of investment securities and unrealized gains and losses valuation adjustments considered other than
temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statements of
operations. The cost of securities sold is determined by the specific identification method.
Financial Instruments
Certain financial instruments, including derivatives, trading securities and investment securities available-for-sale, are recorded at fair
value and unrealized gains and losses are recorded in other comprehensive income (loss) or as part of non-interest income, as
appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined
based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are
derived from pricing models that consider current market and contractual prices for the underlying financial instruments as the well as
time value and yield curve or volatility factors underlying the positions.
100
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental determines the fair value of its financial instruments based on the fair value measurement framework, which establishes a fair
value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 — Level 1 assets and liabilities include equity securities that are traded in an active exchange market. Valuations are
obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair
value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt
securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and
financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models
for which the determination of fair value requires significant management judgment or estimation.
There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring
basis during the years ended December 31, 2019, 2018, and 2017. Oriental’s policy is to recognize transfers at the date of the event or
change in circumstances that caused the transfer.
Impairment of Investment Securities
Oriental conducts periodic reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary
impairment. Oriental separates the amount of total impairment into credit and noncredit-related amounts. The term “other-than-
temporary impairment” is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term
recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying
value of the investment. Any portion of a decline in value associated with a credit loss is recognized in income, while the remaining
noncredit-related component is recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the
amortized cost basis of the security will be recovered by comparing it to the present value of cash flows expected to be collected from
the security discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The
shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the
“credit loss.”
Oriental’s review for impairment generally entails, but is not limited to:
• the identification and evaluation of investments that have indications of possible other-than-temporary impairment;
• the analysis of individual investments that have fair values less than amortized cost, including consideration of the length of
time the investment has been in an unrealized loss position, and the expected recovery period;
• the financial condition of the issuer or issuers;
• the creditworthiness of the obligor of the security;
• actual collateral attributes;
• any rating changes by a rating agency;
• current analysts’ evaluations;
• the payment structure of the debt security and the likelihood of the issuer being able to make payments;
• current market conditions;
• adverse conditions specifically related to the security, industry, or a geographic area;
• Oriental’s intent to sell the debt security;
• whether it is more-likely-than-not that Oriental will be required to sell the debt security before its anticipated recovery; and
• other qualitative factors that could support or not an other-than-temporary impairment.
101
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative Instruments and Hedging Activities
Oriental’s overall interest rate risk-management strategy incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate sensitivity by
modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not,
on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets
and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability
in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are linked to the
forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a prudent method of
managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by
changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by Oriental’s
gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate
fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will
increase or decrease.
Derivative instruments that are used as part of Oriental’s interest rate risk-management strategy include interest rate swaps, caps,
forward-settlement swaps, and futures contracts. Interest rate swaps generally involve the exchange of fixed and variable-rate interest
payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve
exchange-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent
contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified
price within a specified period. Some purchased option contracts give Oriental the right to enter into interest rate swaps and cap and
floor agreements with the writer of the option. In addition, Oriental enters into certain transactions that contain embedded derivatives.
When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic
characteristics of the host contract, it is bifurcated and carried at fair value.
When using derivative instruments, Oriental exposes itself to credit and market risk. If a counterparty fails to fulfill its performance
obligations under a derivative contract due to insolvency or any other event of default, Oriental’s credit risk will equal the fair value
gain in a derivative plus any cash or securities that may have been delivered to the counterparty as part of the transaction terms.
Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes Oriental, thus creating a
repayment risk for Oriental. This risk is generally mitigated by requesting cash or securities from the counterparty to cover the
positive fair value. When the fair value of a derivative contract is negative, Oriental owes the counterparty and, therefore, assumes no
credit risk other than to the extent that the cash or value of the collateral delivered as part of the transactions exceeds the fair value of
the derivative. Oriental minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-
quality counterparties.
Oriental uses forward-settlement swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings
attributable to changes in LIBOR. Once the forecasted wholesale borrowing transactions occur, the interest rate swap will effectively
lock-in Oriental’s interest rate payments on an amount of forecasted interest expense attributable to the one-month LIBOR
corresponding to the swap notional amount. By employing this strategy, Oriental minimizes its exposure to volatility in LIBOR.
As part of this hedging strategy, Oriental formally documents all relationships between hedging instruments and hedged items, as the
well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all
derivatives that are designated as cash flow hedges to (i) specific assets and liabilities on the balance sheet or (ii) specific firm
commitments or forecasted transactions. Oriental also formally assesses (both at the hedge’s inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash
flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The changes in fair
value of the forward-settlement swaps are recorded in accumulated other comprehensive income (loss) to the extent there is no
significant ineffectiveness.
Oriental discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting
changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the
derivative expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur; (iv) a
hedged firm commitment no longer meets the definition of a firm commitment; or (v) management determines that designating the
derivative as a hedging instrument is no longer appropriate or desired.
102
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental’s derivative activities are monitored by its Asset/Liability Management Committee which is also responsible for approving
hedging strategies that are developed through its analysis of data derived from financial simulation models and other internal and
industry sources. The resulting hedging strategies are then incorporated into Oriental’s overall interest rate risk-management.
Off-Balance Sheet Instruments
In the ordinary course of business, Oriental enters into off-balance sheet instruments consisting of commitments to extend credit,
further discussed in Note 27 hereto. Such financial instruments are recorded in the financial statements when these are funded or
related fees are incurred or received. Oriental periodically evaluates the credit risks inherent in these commitments and establishes
accruals for such risks if and when these are deemed necessary.
Mortgage Banking Activities and Loans Held-For-Sale
The residential mortgage loans reported as held-for-sale are stated at the lower of cost or fair value, cost being determined on the
outstanding loan balance less unearned income, and fair value determined in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific
identification method. Loans held-for-sale include all conforming mortgage loans originated and purchased, which from time to time
Oriental sells to other financial institutions or securitizes conforming mortgage loans into GNMA, FNMA and FHLMC pass-through
certificates.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
Oriental recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. Oriental is not engaged in sales of mortgage loans and
mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result
of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale
transactions.
The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in
which Oriental surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in Accounting
Standards Codification ("ASC") Topic 860 are met: (i) the assets must be isolated from creditors of the transferor, (ii) the transferee
must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity. When Oriental transfers financial assets and the transfer fails any one of these criteria, Oriental is prevented
from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto
Rico income tax purposes, Oriental treats the transfers of loans which do not qualify as “true sales” under the applicable accounting
guidance, as sales, recognizing a deferred tax asset or liability on the transaction. For transfers of financial assets that satisfy the
conditions to be accounted for as sales, Oriental derecognizes all assets sold; recognizes all assets obtained and liabilities incurred in
consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value
assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of
financial assets requires a true sale analysis of the treatment of the transfer under state law as if Oriental was a debtor under the
bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the intent of the parties, the nature and
level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is
never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as
the unsettled state of the common law. Once the legal isolation test has been met, other factors concerning the nature and extent of the
transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is
warranted.
103
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the
characteristics of the loans sold. Conforming conventional mortgage loans are combined into pools which are exchanged for FNMA
and GNMA mortgage-backed securities, which are generally sold to private investors, or sold directly to FNMA or other private
investors for cash. To the extent the loans do not meet the specified characteristics, investors are generally entitled to require Oriental
to repurchase such loans or indemnify the investor against losses if the assets do not meet certain guidelines. GNMA programs allow
financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for
which Oriental provides servicing. At Oriental’s option and without GNMA prior authorization, Oriental may repurchase such
delinquent loans for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a
conditional option until the delinquency criteria is met, at which time the option becomes unconditional. When the loans backing a
GNMA security are initially securitized, Oriental treats the transaction as a sale for accounting purposes because the conditional
nature of the buy-back option means that Oriental does not maintain effective control over the loans, and therefore these are
derecognized from the statement of financial condition. When individual loans later meet GNMA’s specified delinquency criteria and
are eligible for repurchase, Oriental is deemed to have regained effective control over these loans, and these must be brought back
onto Oriental’s books as assets, regardless of whether Oriental intends to exercise the buy-back option. Quality review procedures are
performed by Oriental as required under the government agency programs to ensure that asset guideline qualifications are met.
Oriental has not recorded any specific contingent liability in the consolidated financial statements for these customary representation
and warranties related to loans sold by Oriental, and management believes that, based on historical data, the probability of payments
and expected losses under these representation and warranty arrangements is not significant.
Oriental has liability for residential mortgage loans sold subject to credit recourse, principally loans associated with FNMA residential
mortgage loan sales and securitization programs. In the event of any customer default, pursuant to the credit recourse provided,
Oriental is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount
of future payments that Oriental would be required to make under the recourse arrangements in the event of nonperformance by the
borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if
applicable. In the event of nonperformance by the borrower, Oriental has rights to the underlying collateral securing the mortgage
loan. Oriental suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted
mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of
holding and disposing the related property. Oriental has established a liability to cover the estimated credit loss exposure related to
loans sold with credit recourse.
The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit
recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item
"mortgage banking activities" in the consolidated statements of operations) throughout the life of the loan, as necessary, when
additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the
recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience,
foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate
the recourse liability. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of
default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days
delinquent within the following twelve-month period.
Servicing Assets
Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an
obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is
recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans.
Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately
compensate Oriental for its expected cost.
All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value
measurement method, Oriental measures servicing rights at fair value at each reporting date and reports changes in fair value of
servicing asset in the statement of operations in the period in which the changes occur, and includes these changes, if any, with
mortgage banking activities in the consolidated statement of operations. The fair value of servicing rights is subject to fluctuations as a
result of changes in estimated and actual prepayment speeds and default rates and losses.
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The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs,
and other economic factors, which are determined based on current market conditions.
Loans and Leases
Originated and Other Loans and Leases Held in Portfolio
Loans that Oriental originates and intends to hold in portfolio are stated at the principal amount outstanding, adjusted for unamortized
deferred fees and costs which are amortized to interest income over the expected life of the loan using the interest method. Oriental
discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if Oriental does not
expect the full collection of principal or interest. The delinquency status is based upon the contractual terms of the loans.
Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted
for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until
interest is received on a current basis and other factors indicative of doubtful collection cease to exist. The determination as to the
ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial
condition and prospects for repayment.
Oriental follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide
for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of loan grades assigned to commercial loans. The provision for loan and lease
losses charged to current operations is based on such methodology. Loan and lease losses are charged, and recoveries are credited to
the allowance for loan and lease losses on originated and other loans.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where
appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, and legal options available to Oriental.
Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current
information and events, it is probable that Oriental will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the
fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of
small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the
lower of cost or fair value. Oriental measures for impairment all commercial loans over $500 thousand (i) that are either over 90 days
past due or adversely classified, (ii) that are troubled-debt restructurings (each, a "TDR”), or (iii) when deemed necessary by
management. The portfolios of mortgage loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated
collectively for impairment.
Oriental uses a rating system to apply an overall allowance percentage to each originated and other loan portfolio segment based on
historical credit losses adjusted for current conditions and trends. The historical loss experience is determined by portfolio segment
and is based on the actual loss history experienced by Oriental over a determined look back period for each segment. The actual loss
factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is
supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include
consideration of the following: the loan grades assigned to commercial loans; levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last
examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory
requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and
collateral value. An additional impact from the historical loss experience is applied based on levels of delinquency, loan
classification, FICO score and/or origination date, depending on the portfolio.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market.
Loans that will be held in Oriental’s portfolio are carried at amortized cost. Residential mortgage loans held for sale are recorded at
the lower of the aggregate cost or market value (“LOCOM”).
Acquired Loans and Leases
Loans that Oriental acquires in acquisitions are recorded at fair value with no carryover of the related allowance for loan losses.
Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be
collected on the loans and discounting those cash flows at a market rate of interest.
Oriental has acquired loans in three separate acquisitions, the Scotiabank PR & USVI Acquisition on December 31, 2019, the
BBVAPR Acquisition in December 2012 and the FDIC-assisted Eurobank acquisition in April 2010. For each acquisition, Oriental
considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality and was therefore in
the scope of ASC 310-30:
• Loans that were 90 days or more past due;
• Loans that had an internal risk rating of substandard or worse (substandard is consistent with regulatory definitions and is
defined as having a well-defined weakness that jeopardizes liquidation of the loan);
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and
• Loans that had been previously modified in a TDR.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660
acquired at a premium in the Scotiabank PR & USVI Acquisition and BBVAPR Acquisition are accounted for under this guidance.
Auto loans with FICO scores below 660 were acquired at a discount and are accounted for under the provisions of ASC 310-30. The
provisions of ASC 310-20 require that any differences between the contractually required loan payments in excess of Oriental’s initial
investment in the loans be accreted into interest income on a level-yield basis over the life of the loan. Loans acquired in the BBVAPR
Acquisition that were accounted for under the provisions of ASC 310-20 which had fully amortized their premium or discount,
recorded at the date of acquisition, are removed from the acquired loan category. Loans accounted for under ASC 310-20 are placed
on non-accrual status when past due in accordance with Oriental’s non-accruing policy and any accretion of discount is discontinued.
These assets were recorded at estimated fair value on their acquisition date, incorporating an estimate of future expected cash flows.
Such fair value includes a credit discount which accounts for expected loan losses over the estimated life of these loans. Management
takes into consideration this credit discount when determining the necessary allowance for acquired loans that are accounted for under
the provisions of ASC 310-20.
The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated
and other loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. Oriental determined
that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the
valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit
losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the
amounts of contractually required principal and interest that Oriental did not expect to collect as of the acquisition date. Based on the
guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired
pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount
attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value.
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as
the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred
over the life of the acquired loans. Subsequent decreases to the expected cash flows require Oriental to evaluate the need for an
addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated
allowance for loan losses, if any and the reversal of a corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
Oriental’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the
acquired loans to date and Oriental’s best estimates for the expected lifetime credit performance of the loans using currently available
information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the
fair value adjustment.
In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount
of cash flows expected to be collected. Oriental performs such an evaluation on a quarterly basis on both its acquired loans
individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy.
Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this
evaluation, a determination is made as to whether or not Oriental has a reasonable expectation about the timing and amount of cash
flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For mortgage and other consumer loans, expected cash flow estimates are calculated based on a model that incorporates a
probability of default (PD). For commercial loans, it is based on the same methodology with probability of default and loss assigned to
each pool with consideration given for pool make-up, considering individual loan grades for commercial loans. The probability of
default and loss are developed from internally generated historical loss data and are applied to each pool.
To the extent that Oriental cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for
loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as Oriental can reasonably
estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest in Oriental’s financial statement disclosures, regardless
of whether or not Oriental expects any principal or interest cash flows on an individual loan 90 days or more past due.
Oriental writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
Allowance for Loan and Lease Losses
Oriental follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide
for inherent losses in loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans.
Oriental’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC
Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, Oriental determines the allowance for loan losses on
purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in
expected cash flows after the acquisition date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The quantitative component uses a loss factor for the general reserve of these loans established by considering Oriental’s historical
loss experience adjusted for an estimated loss emergence period and the consideration of qualitative factors. Qualitative factors
considered are: change in non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes
in collateral values; changes in risk selections and underwriting standards, and other changes in lending policies, procedures and
practices; experience, ability and depth of lending management and other relevant staff, including Oriental’s loan review system;
national and local economic trends and industry conditions; and effect of external factors such as competition and regulatory
requirements on the level of estimated credit losses. The sum of the adjusted loss experience factors and the qualitative factors will be
the general valuation reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each
category.
Originated and Other Loans and Leases Held for Investment and Acquired Loans Accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Oriental determines the allowance for loan and lease losses by portfolio segment, which consist of mortgage loans, commercial loans,
consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan
modification programs and mortgage secured personal loans. Traditional mortgage loans include loans secured by a dwelling, fixed
coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules and
loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being serviced
under such programs. Mortgage loans are mainly equity lines of credit. The allowance factor on mortgage loans is impacted by the
adjusted historical loss factors on the sub-segments and the qualitative factors described above and by delinquency buckets. The
traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets. Effective on the fourth quarter
of 2018, the calculation of the loss factor was changed from historical loss experience to a probability of default (“PD”) and loss
given default (“LGD”) methodology. The PD results from a delinquency migration analysis and the LGD is based on the Bank’s
historical loss experience. The segments and sub-segments remained unchanged as well as the qualitative factors adjustments. These
changes are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made
prospectively.
Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail,
floor plan, and real estate), by collateral type (secured by real estate and other commercial and industrial assets), and loan grades.
Quantitative components use a loss factor for the GVA of these loans established by considering Oriental's historical loss experience
of each segment adjusted for the loss realization period and the consideration of qualitative factors. The sum of the adjusted loss
experience and the qualitative factors is the GVA factor used for the determination of the allowance for loan and lease losses on each
segment.
Consumer loans: The consumer portfolio consists of smaller retail loans such as retail credit cards, overdrafts, unsecured personal
lines of credit, and personal unsecured loans. The allowance factor, consisting of the adjusted historical loss factor and the qualitative
factors, will be calculated for each sub-class of loans by delinquency bucket.
Auto and Leasing: The auto and leasing portfolio consists of financing for the purchase of new or used motor vehicles for private or
public use. The allowance factor is impacted by the adjusted historical loss factor and the qualitative factors. For the determination
of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by delinquency
bucket.
Oriental establishes its allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of
the loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss
experience, and other factors that warrant recognition in determining our allowance for loan losses. Oriental continues to monitor and
modify the level of the allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
Our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on
specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with
similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective
loan types.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest
due under the original terms of a business or commercial real estate loan greater than $500 thousand, such loan will be classified as
impaired. Additionally, all loans modified in a TDR are considered impaired. The need for specific valuation allowances are
determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral,
less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in
determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off
immediately.
Loan loss ratios and loan grades, for commercial loans, are updated at least quarterly and are applied in the context of GAAP.
Management uses current available information in estimating possible loan and lease losses, factors beyond Oriental’s control, such as
those affecting general economic conditions, may require future changes to the allowance.
Acquired Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30, our allowance for loan losses is estimated based upon our expected cash
flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in the net
present value of our expected cash flows (which are used as a proxy to identify probable incurred losses) subsequent to the acquisition
of the loans, an allowance for loan losses is established based on our estimate of future credit losses over the remaining life of the
loans.
Acquired loans accounted for under ASC Subtopic 310-30 are not considered non-performing and continue to have an accretable yield
as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-
off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs on loans
accounted under ASC Subtopic 310-30 are recorded only to the extent that losses exceed the non-accretable difference established
with purchase accounting.
For the principal enhancements management made to its methodology, refer to Note 7.
Troubled Debt Restructuring
A TDR is the restructuring of a receivable in which Oriental, as creditor, grants a concession for legal or economic reasons due to the
debtor’s financial difficulties. A concession is granted when, as a result of the restructuring, Oriental does not expect to collect all
amounts due, including interest accrued at the original contract rate. These concessions may include a reduction of the interest rate,
principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses.
To assess whether the debtor is having financial difficulties, Oriental evaluates whether it is probable that the debtor will default on
any of its debt in the foreseeable future.
Receivables that are restructured in a TDR are presumed to be impaired and are subject to a specific impairment-measurement
method. If the payment of principal at original maturity is primarily dependent on the value of collateral, Oriental considers the current
value of that collateral in determining whether the principal will be paid. For non-collateral dependent loans, the specific reserve is
calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate. An accruing loan that is
modified in a TDR can remain in accrual status if, based on a current, well-documented credit analysis, collection of principal and
interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical
repayment performance for a reasonable period before the modification.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable
losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of financial condition. The
determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities. Net adjustments to the
reserve for unfunded commitments are included in other operating expenses in the consolidated statements of operations.
FDIC Indemnification Asset and True-up Payment Obligation
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The FDIC indemnification asset was accounted for and measured separately from the covered loans acquired in the Eurobank FDIC-
assisted acquisition as it was not contractually embedded in any of the covered loans. The indemnification asset was recorded at fair
value at the acquisition date and represented the present value of the estimated cash payments expected to be received from the FDIC
for future losses on covered assets based on the credit adjustment estimated for each covered asset and the shared-loss percentages.
This balance also included incurred expenses under the shared-loss agreements. These cash flows were then discounted at a market-
based rate to reflect the uncertainty of the timing and receipt of the shared-loss reimbursements from the FDIC. The time value of
money incorporated into the present value computation was accreted into earnings over the shorter of the life of the shared-loss
agreements or the holding period of the covered assets.
The FDIC indemnification asset was reduced as shared-loss payments were received from the FDIC. Realized credit losses in excess
of acquisition-date estimates resulted in an increase in the FDIC indemnification asset. Conversely, if realized credit losses were less
than acquisition-date estimates, the FDIC indemnification asset was amortized through the term of the shared-loss agreements.
The true-up payment obligation associated with the loss share agreements was accounted for at fair value in accordance with ASC
Section 805-30-25-6 as it was considered contingent consideration. The true-up payment obligation was included as part of other
liabilities in the consolidated statements of financial condition. Any changes in the carrying value of the obligation were included in
the category of FDIC loss share income (expense) in the consolidated statements of operations.
On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a
payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the
anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the
end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
Goodwill and Intangible Assets
Oriental’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles with
indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate
impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or
dispose of a reporting unit.
Under applicable accounting standards, goodwill impairment analysis is a two-step test. Oriental has the option to first assess
qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value
of the reporting unit is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than its
carrying amount, or if Oriental chooses to bypass the qualitative assessment, Oriental compares each reporting unit's fair value to its
carrying value to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of
the reporting unit is not considered impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair
value, a second step would be performed that would compare the implied fair value of the reporting unit's goodwill with the carrying
amount. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business
combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting
units. Oriental performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing
basis. Oriental performed its annual impairment review of goodwill during the fourth quarter of 2019 and 2018 using October 31,
2019 and 2018 as the annual evaluation dates and concluded that there was no impairment at December 31, 2019 and 2018.
Foreclosed Real Estate and Other Repossessed Property
Foreclosed real estate and other repossessed property are initially recorded at the fair value of the real estate or repossessed property
less the cost of selling it at the date of foreclosure or repossession. At the time properties are acquired in full or partial satisfaction of
loans, any excess of the loan balance over the estimated fair value of the property is charged against the allowance for loan and lease
losses on non-covered loans. After foreclosure or repossession, these properties are carried at the lower of cost or fair value less
estimated cost to sell based on recent appraised values or options to purchase the foreclosed or repossessed property. Any excess of
the carrying value over the estimated fair value, less estimated costs to sell, is charged to non-interest expense. The costs and expenses
associated to holding these properties in portfolio are expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over
the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method
over the terms of the leases or estimated useful lives of the improvements, whichever is shorter.
Impairment of Long-Lived Assets
Oriental periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected
to result from the use of the asset and its eventual disposition is made. If the sum of the future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. The amount of the impairment is the
excess of the carrying amount over the fair value of the asset. As of December 31, 2019 and 2018, there was no indication of
impairment as a result of such review.
Income Taxes
In preparing the consolidated financial statements, Oriental is required to estimate income taxes. This involves an estimate of current
income tax expense together with an assessment of deferred taxes resulting from differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax
expense involves estimates and assumptions that require Oriental to assume certain positions based on its interpretation of current tax
laws and regulations. Changes in assumptions affecting estimates may be required in the future, and estimated tax assets or liabilities
may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and
circumstances, such as the progress of tax audits, case law and emerging legislation. When particular matters arise, a number of years
may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a
reduction to Oriental’s effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the
effective tax rate and may require the use of cash in such year.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate
temporary differences. The carrying value of Oriental’s net deferred tax assets assumes that Oriental will be able to generate sufficient
future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, Oriental
may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the
consolidated statements of operations.
Management evaluates on a regular basis whether the deferred tax assets can be realized and assesses the need for a valuation
allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its
deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in Oriental’s tax provision
in the period of change.
In addition to valuation allowances, Oriental establishes accruals for uncertain tax positions when, despite the belief that Oriental’s tax
return positions are fully supported, Oriental believes that certain positions are likely to be challenged. The accruals for uncertain tax
positions are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging
legislation. The accruals for Oriental’s uncertain tax positions are reflected as income tax payable as a component of accrued expenses
and other liabilities. These accruals are reduced upon expiration of the applicable statute of limitations.
Oriental follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Oriental’s policy is to include interest and penalties related to unrecognized income tax benefits within the provision for income taxes
on the consolidated statements of operations.
Oriental is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2015 to 2018, until the
applicable statute of limitations expires. In addition, Oriental’s US subsidiaries are potentially subject to income tax audits by the IRS
for taxable years 2016 to 2018. Tax audits by their nature are often complex and can require several years to complete.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition
In May 2014 FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (ASC 606) to clarify the principles for
recognizing revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, provide a
more robust framework for addressing the revenue issues, improve comparability in revenue recognition and to simplify the
preparation of financial statements by reducing the number of requirements to which an entity must refer.
The standard defines revenue (ASC-606-10-20) as inflows or other enhancements of assets of an entity or settlements of its liabilities
(or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s
ongoing major or central operations.
Revenue is recognized when (or as) the performance obligation is satisfied by transferring control of a promised good or service to a
customer, either at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also
recognized over time.
Equity-Based Compensation Plan
Oriental’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and
further amended in 2010 and 2013.
The purpose of the Omnibus Plan is to provide flexibility to Oriental to attract, retain and motivate directors, officers, and key
employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation
practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high
levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an
“Award”) are intended to be based upon the recipient’s individual performance, corporate performance, level of responsibility and
potential to make significant contributions to Oriental. Generally, the Omnibus Plan will terminate as of (a) the date when no more of
Oriental’s shares of common stock are available for issuance under the Omnibus Plan or, (b) if earlier, the date the Omnibus Plan is
terminated by Oriental’s Board of Directors.
The Board’s Compensation Committee (the “Committee”), or such other committee as the Board may designate, has full authority to
interpret and administer the Omnibus Plan in order to carry out its provisions and purposes. The Committee has the authority to
determine those persons eligible to receive an Award and to establish the terms and conditions of any Award. The Committee may
delegate, subject to such terms or conditions or guidelines as it shall determine, to any employee or group of employees any portion of
its authority and powers under the Omnibus Plan with respect to participants who are not directors or executive officers subject to the
reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Only the
Committee may exercise authority in respect to Awards granted to such participants.
The expected term of stock options granted represents the period of time that such options are expected to be outstanding. Expected
volatilities are based on historical volatility of Oriental’s shares of common stock over the most recent period equal to the expected
term of the stock options. For stock options issued during 2015, the expected volatilities are based on both historical and implied
volatility of Oriental’s shares of common stock.
Oriental follows the fair value method of recording stock-based compensation. Oriental used the modified prospective transition
method, which requires measurement of the cost of employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award with the cost to be recognized over the service period. It applies to all awards unvested and
granted after the effective date and awards modified, repurchased, or cancelled after that date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other
events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that
recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities and on derivative activities that qualify and are designated for cash flows
hedge accounting, net of taxes, are reported as a separate component of the stockholders’ equity section of the consolidated statements
of financial condition, such items, along with net income, are components of comprehensive income (loss).
Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Lessee Accounting
Right of use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that
a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation
to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease
payments over the lease term calculated using our incremental borrowing rate. Lease terms include options to extend or terminate the
lease when it is reasonably certain that those options will be exercised. The right-of-use asset is measured at the amount of the lease
liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease
payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining
lease term on a straight-line basis, and any impairment of the right-of-use asset. Variable lease payments are generally expensed as
incurred and include certain non-lease components, such as maintenance and other services provided by the lessor, and other charges
included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these
short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
Oriental’s leases do not contain residual value guarantees or material variable lease payments. All leases were classified as operating
leases.
Substantially all of the leases in which Oriental is the lessee are comprised of real estate property for branches, ATM locations, and
office space with terms extending through 2032. All of our leases are classified as operating leases, and therefore, were previously not
recognized on Oriental’s consolidated statements of financial condition. With the adoption of Topic 842, operating lease agreements
are required to be recognized on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease
liability. Oriental leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.
Subsequent Events
Oriental has evaluated other events subsequent to the balance sheet date and prior to the filing of this annual report on Form 10-K for
the year ended December 31, 2019, and has adjusted and disclosed those events that have occurred that would require adjustment or
disclosure in the consolidated financial statements.
New Accounting Updates Not Yet Adopted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," (CECL) which replaces the existing incurred
loss impairment methodology for loans that are collectively evaluated for impairment with a methodology that reflects management’s
best estimate of lifetime expected credit losses and requires consideration of reasonable and supportable economic forecasts to
develop a lifetime credit loss estimate. Topic 326 requires additional qualitative and quantitative disclosure to allow users to better
understand the credit risk within the portfolio and the methodologies for determining the allowance for credit losses. The CECL
standard also simplifies the accounting model for purchased credit impaired loans. Oriental will adopt Topic 326 effective January 1,
2020 using the modified retrospective approach.
Our methodology for estimating lifetime expected credit losses for our loan portfolios will include the following key components:
• Segmentation of loans into pools that share common risk characteristics;
• An economic forecast period based on the relation of losses with key economic variables for each portfolio segment;
• Reversion period to historical loss experience using straight-line method;
•
• Discounted cash flow (DCF) method to measure credit impairment on most of our loan portfolios;
• Credit losses for loans that do not share similar risk characteristics are estimated on an individual basis. Individual
Inclusion of qualitative adjustments to consider factors that have not been accounted for;
evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. The
lifetime losses for individually measured loans are estimated based on one of several methods, including the estimated fair
value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.
• The estimation methodology for credit losses on unfunded lending-related commitments is similar to the process for
estimating credit losses for loans, with the addition of a probability of draw estimate that is applied to each commitment.
As part of our evaluation of the estimated impacts of CECL, we have run simulations based on our portfolio composition and current
expectations of future economic conditions. The ultimate effect of CECL on our ACL will depend the portfolio’s credit quality and
economic conditions at the time of adoption. The Company’s CECL implementation efforts are in process and continue to focus on
model validation, refinement of the model assumptions, the qualitative factor, and the operational control framework to support the
new process. During the first quarter of 2020, we expect all internal reviews of the adjustments to be finalized, and all processes and
controls surrounding the ongoing estimate to be fully implemented and documented. At adoption, we expect to have a cumulative-
effect adjustment to retained earnings for this change in the ACL, which would impact our capital. Oriental expects to continue to be
well capitalized under the Basel III regulatory framework after the adoption of this standard. Oriental will avail itself of the option to
phase-in over a period of three years the day one effects on regulatory capital from the adoption of CECL. For PCD loans, including
BBVA and Eurobank acquired book plus the recently acquired Scotiabank, the adjustment will be made through the allowance and
loan balances with no impact in capital.
Topic 326 also requires expected credit losses on available-for-sale (AFS) debt securities be recorded as an allowance for credit losses.
For certain types of debt securities, such as U.S. Treasuries and other securities with government guarantees, entities may expect zero
credit losses. Oriental estimates that the adoption of this standard on January 1, 2020 will not have a material impact on our portfolio
of AFS debt securities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). In
August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, which aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). Accordingly, ASU 2018-15 requires an entity (customer) in a hosting arrangement that is a service contract to
follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service
contract and which costs to expense. The ASU also requires the entity (customer) to expense the capitalized implementation costs of a
hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.
This ASU is the final version of Proposed Accounting Standards Update 2018–230—Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract, which has been deleted. This ASU will be applied prospectively for annual and interim periods in fiscal years
beginning after December 15, 2019. Early adoption is permitted. The effects of this standard on our consolidated statement of
financial position, results of operations or cash flows are not expected to be material.
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement. In August 2018, the FASB issued ASU 2018-13, which modifies disclosure requirements related to fair value
measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption
is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while
delaying adoption of the additional disclosures until their effective date.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which simplifies the
measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill
impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting
unit. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. The
effects of this standard on our consolidated statement of financial position, results of operations or cash flows are not expected to be
material.
New Accounting Updates Adopted During the Current Year
Leases. In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), the FASB issued ASU No. 2016-02, under the new
guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability,
which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains
largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating
leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current
accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new
revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense.
Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial
statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough
information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an
entity’s leasing activities. All entities are required to use a modified retrospective approach for leases that exist or are entered into after
the beginning of the earliest comparative period in the financial statements. As Oriental elected the transition option provided in ASU
No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017).
Oriental also elected certain relief options offered in ASU 2016-02 including the package of practical expedients and the option not to
recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less).
Oriental also elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and
impairment of right-of-use assets. Oriental has several lease agreements, mainly branch locations, which are considered operating
leases, and therefore, were not previously recognized on Oriental’s consolidated statements of financial condition. The new guidance
requires these lease agreements to be recognized on the consolidated statements of financial condition as a right-of-use asset and a
corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of operations or the
consolidated statements of cash flows. See Note 28 Leases for more information.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Leases - Targeted Improvements. In July 2018, the FASB issued ASU No. 2018-11 to provide entities with relief from the costs of
implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11:
(1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors
may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective
date as ASU 2016-02 (January 1, 2019 for Oriental). Oriental adopted ASU 2018-11 on its required effective date of January 1, 2019
and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on Oriental’s consolidated financial
statements.
Narrow-Scope Improvements for Lessors. In December 2018, the FASB issued ASU No. 2018-20 which allows lessors to make an
accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor
to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf and include lessor costs that are paid by the lessor
and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when
lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new
leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease
component. Oriental adopted ASU 2018-20 on its required effective date of January 1, 2019 and elected to present sales taxes and
other similar taxes collected from lessees on a net basis as described in (1) above. ASU 2018-20 did not have a material impact on
Oriental’s consolidated financial statements.
Leases: Codification Improvements. In March 2019, the FASB issued ASU No. 2019-01 which states that for lessors that are not
manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a
significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC
942 (such as Oriental) must classify principal payments received from sales-type and direct financing leases in investing activities in
the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of
adoption. To coincide with the adoption of ASU No. 2016-02, Oriental elected to early adopt ASU 2019-01 on January 1, 2019. The
adoption of this ASU did not have a material impact on Oriental’s consolidated financial statements.
Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued ASU No. 2017-12 with the objectives
to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk
management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management
activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. This guideline allows the
entity to elect whether to perform quantitative or qualitative assessments for their hedge accounting transactions. In addition, the
guideline provides that “an entity may reclassify a debt security from held-to-maturity (HTM) to available-for-sale (AFS) if the debt
security is eligible to be hedged under the last-of-layer method in accordance with paragraph 815-20-25-12A. Any unrealized gain or
loss at the date of the transfer shall be recorded in accumulated other comprehensive income in accordance with paragraph 320-10-35-
10(c).” Transition elections must be adopted within the timeframe outlined in paragraphs 815-20-65-3(f) to 65-3(g). This includes the
transition election available for the transfer of eligible securities from the HTM to the AFS category. ASU No. 2017-12 is effective for
interim and annual reporting periods beginning after December 15, 2018. Oriental elected to maintain its current quantitative
assessment for the existing hedge accounting transaction. In addition, Oriental elected to reclassify all of the securities in its held-to-
maturity portfolio amounting to $424.7 million to its available-for-sale portfolio, as they were debt securities that qualified as eligible
to be hedged under the last-of-layer method. The new guidance did not have a material impact on the consolidated statements of
operations or the consolidated statement of cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 2 – BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
On December 31, 2019, Oriental purchased from the Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de
Puerto Rico for an aggregate purchase price of $550.0 million, subject to settlement amounts as described herein. Immediately
following the closing, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the
surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an
acquisition of certain assets (including loans, ATMs and physical branch locations) and an assumption of certain liabilities (including
deposits) for their net book value plus a $10.0 million premium on deposits which were settled as part of the final consideration from
the acquisition. In addition, Oriental acquired certain loans and assumed certain liabilities, from BNS’s Puerto Rico branch for their
net book value which were settled as part of the final consideration from the acquisition. As a result of the acquisition, Oriental added
$2.2 billion net loans and $3.0 billion dollars in core low-cost deposits and resulted in a bargain purchase gain of $315 thousand,
included as “Bargain purchase from Scotiabank PR & USVI acquisition” in the Consolidated Statement of Operations. The reason for
the bargain purchase gain is primarily due to the pricing strategy on the deal and the value of acquired tax benefits which are
considered realizable based on the combined results. The audited consolidated financial statements contemplate the effect of the
Scotiabank PR & USVI Acquisition. Oriental entered into the Scotiabank PR & USVI Acquisition as part of its growth strategy to
increase its market share and improve its core deposit base and competitive positioning.
Cash consideration (in thousands):
SBPR purchase price
Premium on USVI deposits
BNS USVI net liabilities assumed
BNS PR net assets acquired
Total cash consideration
Cash consideration paid on December 31, 2019
Cash consideration payable
$
$
550,000
10,000
(182,244)
52,681
430,437
425,242
5,195
The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed
from the Scotiabank PR & USVI Acquisition. The final determination of the fair value of certain assets and liabilities will be
completed up to a one-year measurement period from the date of acquisition as required by the FASB ASC Topic 805, “Business
Combinations”. As of December 31, 2019, we continued to analyze the assumptions and related valuation results associated with the
acquired loans. Due to the complexity in valuing the loans and the significant amount of data inputs required, the valuation of the
loans, including unfunded lending-related commitments, is not yet final. The table below reflects provisional adjustments recorded as
of December 31, 2019. Any additional potential adjustment could be material in relation to the preliminary values presented below:
117
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cash and cash equivalents
Investments
Loans
Accrued interest receivable
Foreclosed real estate
Deferred tax asset, net
Premises and equipment
Servicing asset
Core deposit intangible
Customer relationship intangible
Other intangible
Operating lease right-of-use assets
Other assets
Total identifiable assets acquired
Deposits
Operating lease liability
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net assets
Bargain purchase gain
Total consideration
December 31, 2019
Fair Value
Adjustments,
net
(In thousands)
Fair Value
Book Value
$
492,512
$
576,319
2,237,337
7,722
8,636
37,606
10,866
40,258
-
-
-
15,452
86,016
3,512,724
3,028,066
16,317
87,309
3,131,692
-
$
(102)
492,512
576,217
(21,134)
2,216,203
(2,952)
(352)
22,335
(1,068)
206
41,507
12,693
567
4,011
4,770
8,284
59,941
9,798
40,464
41,507
12,693
567
19,463
(6,507)
49,204
79,509
3,561,928
(2,607)
3,025,459
2,091
-
(516)
18,408
87,309
3,131,176
$
430,752
315
$
430,437
Fair Value of Identifiable Assets Acquired and Liabilities Assumed
In order to allocate the consideration transferred for Scotiabank PR & USVI, the fair value of all identifiable assets and liabilities were
established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value
Measurements and Disclosures” as the practice that would be received upon the sale of an asset or the amount paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers
and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset
assume the highest and best use of that asset by market participants. Use of the different estimates and judgments could yield different
results. In determining the fair value of identifiable assets and liabilities assumed, a review was conducted for any significant
contingent asset or liabilities existing as of the acquisition date. The preliminary assessment did not identify any significant
contingencies related to existing legal or government action.
The methods used to determine the fair values of the significant identifiable assets acquired and liabilities assumed are described
below.
Cash and cash equivalents - Cash and cash equivalents include cash and due from banks, and interest-earning deposits with banks
and the Federal Reserve System. The fair value of financial instruments that are short-term or re-price frequently and that have
little or no risk were considered to have a fair value that approximates to carrying value.
118
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Investment securities – The fair value of securities were based on quoted market prices.
Federal Home Loan Bank stock - The fair value of acquired FHLB stock was estimated to be its redemption value.
Loans – The fair values of loans acquired in the Scotiabank PR & USVI Acquisition was based on a discounted cash flow
methodology that used projections of interest and principal payments based on certain valuation assumptions such as default rates,
loss severity, discount rates and prepayment rates. Other factors expected by market participants were considered in determining
the fair value of acquired loans, including loan pool level estimated cash flows, type of loan and related collateral, risk
classification status (i.e., performing or nonperforming), term of loan, whether or not the loan was amortizing, and current discount
rates.
The methods used to estimate fair value are extremely sensitive to the assumptions and estimates used. While management
attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater
degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, there can be no
assurance that this information is useful for purposes of evaluating the financial condition and/or value of Oriental in and of itself
or in comparison with any other company.
Foreclosed real estate - Foreclosed real estate and other repossessed properties (vehicles) are presented at their estimated fair
value. The fair values were determined using their expected selling price, less selling and carrying costs, discounted to present
value.
Deferred taxes - Deferred income taxes relate to the differences between the book and tax bases of assets acquired and liabilities
assumed in this transaction pursuant to ASC 740, Income Taxes. The deferred tax asset, net assumes non-taxable transaction
through a stock acquisition. Therefore, the tax basis of assets acquired and liabilities assumed will carry over to Oriental without
consideration of fair value adjustments. Oriental used the enacted tax rate of 37.5%, and the 20% preferential tax rate where
applicable, in measuring deferred taxes resulting from the Scotiabank PR & USVI Acquisition.
Premises and equipment – The fair value of premises, including land, buildings and improvements, was determined based upon
appraisals by licensed appraisers. These appraisals were based upon the best and highest use of the property with final values
determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property
appraised. This fair value of owned real estate resulted in an estimated premium of $2.1 million, to be amortized over the weighted
average remaining useful life of the properties, estimated to be nine years.
Servicing asset - The fair value of servicing asset was estimated by using a cash flow valuation model which calculates the present
value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount
rates, servicing costs, and other economic factors, which are determined based on current market conditions.
Core deposit intangible (“CDI”) - CDI is a measure of the value of non-interest checking, savings, and NOW and money market
deposits that are acquired in business combinations. The fair value of the CDI stemming from the business combination is based on
projecting net cash flow benefits, including assumptions related to customer attrition rates, discount rate, and alternative costs of
funds, to be amortized using an accelerated method over a useful life of ten years.
Customer relationship intangible (“CRI”) - CRI is a measure of the value of insurance client relationships that were acquired in
the business combination. The fair value was computed using a multiperiod cash flow model, a form of the income approach and
discounted using an appropriate risk-adjusted discount rate. This measure of fair value requires considerable judgments about
future events, including customer retention and attrition estimates, to be amortized using an accelerated method over a useful life
of ten years.
Other intangibles – Other intangibles represents the non-competition and non-solicitation covenants by BNS for a period of three
and two years, respectively. The fair value was computed using a “with-and-without method” cash flow model, a form of the
income approach and discounted using an appropriate risk-adjusted discount rate. This measure of fair value requires considerable
judgments about future events, including customer retention and attrition estimates, to be amortized using an accelerated method
over a useful life of three years.
Operating lease right-of-use asset – The fair value of the operating lease right-of-use asset was determined by comparing with
market terms of leases of the same or similar terms at the acquisition date, if terms were favorable Oriental recognized an
119
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
intangible asset, if terms were unfavorable Oriental recognized an intangible liability. This fair value of operating lease right-of-
use assets resulted in an estimated premium of $1.1 million, to be amortized over the lease term.
Deposit liabilities - The fair values used for demand and savings deposits are, by definition, equal to the amount payable on
demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow method that applies
interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities of such time deposits, to
be amortized using a straight-line method over a useful life of one year.
Other assets and other liabilities - Given the short-term nature of these financial instruments, the carrying amounts reflected in the
statement of assets acquired and liabilities assumed approximated fair value.
Financial Information — Scotiabank PR & USVI Acquisition
Oriental’s consolidated results of operations for 2019 do not include any operations from Scotiabank PR & USVI acquisition since the
acquisition date was December 31, 2019. Expenses relating to the Scotiabank PR & USVI Acquisition amounted to $24.1 million and
were included in the December 31, 2019 consolidated statement of operations.
The following summarizes the unaudited pro forma results of operations as if Oriental had acquired Scotiabank de Puerto Rico
(“SBPR”) on January 1, 2018. Oriental believes that given the nature of assets and liabilities assumed and the significant amount of
fair value adjustments, historical results of BNS USVI and BNS Puerto Rico branches are not meaningful to Oriental’s results, and
thus not included in the pro-forma information presented. The pro-forma results were calculated by combining the results of Oriental
with the stand-alone results of SBPR for the pre-acquisition periods, which were adjusted to account for certain costs that would have
been incurred during this pre-acquisition period:
Net interest income
Net income
Earnings per share:
Basic
Diluted
Merger and Restructuring Charges
Year Ended December 31,
2019
2018
(In thousands)
$
478,293 $
147,848
488,791
161,555
3.01
2.99
3.55
3.25
Merger and restructuring charges are recorded in the consolidated statement of operations and include incremental costs to integrate
the operations of Oriental and its most recent acquisition, including the costs of transition services provided by the Bank of Nova
Scotia. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully
integrated combined organization. These costs were recorded in merger and restructuring charges within the consolidated statement of
operations. Payments under merger and restructuring associated with the Scotiabank PR & USVI Acquisition are expected to continue
into 2020 and will be under applicable accounting guidance to the cost being incurred.
120
OFG BANCORP
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
Regulatory requirements
Obligations under agreement of loans sold with recourse
December 31,
2019
2018
(In thousands)
$
$
- $
400
1,050
1,450 $
1,980
-
1,050
3,030
At December 31, 2019 and 2018, the Bank’s international banking entities, OIB and Oriental Overseas, a division of the Bank, held
short-term highly liquid securities in the amount of $305 thousand and $325 thousand, respectively, as the legal reserve required for
international banking entities under Puerto Rico law. In addition, as part of the Scotiabank PR & USVI acquisition on December 31,
2019, a certificate of deposit of $300 thousand was held for the international banking entity that was retained as part of the integration.
These instruments cannot be withdrawn or transferred by OIB or Oriental Overseas without the prior written approval of the Office of
the Commissioner of Financial Institutions of Puerto Rico (the "OCFI").
As part of regulatory requirements for the administration of Individual Retirement Accounts (IRAs), Scotiabank maintained $100
thousand on a certificate of deposit that was registered as part of the integration on December 31, 2019.
As part of its derivative activities, Oriental enters into collateral agreements with certain financial counterparties. At December 31,
2019 collateral agreements have expired. At December 31, 2018, Oriental had delivered approximately $2.0 million of cash as
collateral for such derivatives activities.
Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At
December 31, 2019 and 2018, Oriental delivered as collateral cash amounting to approximately $1.1 million, for both periods.
The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those
minimum average reserve balances for the week that covered December 31, 2019 was $289.3 million (December 31, 2018 - $211.6
million). At December 31, 2019 and 2018, the Bank complied with this requirement. Cash and due from bank as well as other short-
term, highly liquid securities, are used to cover the required average reserve balances.
NOTE 4 – INVESTMENT SECURITIES
Money Market Investments
Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or
less at the date of acquisition. At December 31, 2019 and 2018, money market instruments included as part of cash and cash
equivalents amounted to $6.8 million and $4.9 million, respectively.
121
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at
December 31, 2019 and 2018 were as follows:
Gross
December 31, 2019
Gross
Amortized
Cost
Unrealized
Unrealized
Gains
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
Other debt securities
Total investment securities
Total securities available for sale
$
403,227 $
215,755
55,235
846 $
718
16
1,417 $
4
490
402,656
216,469
54,761
674,217
1,580
1,911
673,886
397,183
1,967
1,108
400,258
1,074,475 $
$
-
-
31
31
1,611 $
-
6
-
6
1,917 $
397,183
1,961
1,139
400,283
1,074,169
2.00%
2.33%
1.97%
2.11%
1.60%
1.38%
3.00%
1.60%
1.92%
122
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
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
Other debt securities
Total investment securities
Total securities available-for-sale $
$
561,878
211,947
$
66,230
840,055
10,924
2,325
1,207
14,456
854,511 $
$
404
1,050
-
1,454
$
8,951
2,827
553,331
210,170
2,166
13,944
64,064
827,565
-
-
119
60
15
15
1,469 $
-
179
14,123 $
10,805
2,265
1,222
14,292
841,857
2.59%
3.10%
1.90%
2.66%
1.36%
1.38%
2.99%
1.50%
2.64%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates
$
424,740 $
- $
14,387 $
410,353
2.07%
On January 1, 2019, Oriental adopted the ASU No. 2017-12 and reclassified all of its mortgage backed securities with a carrying value
of $424.7 million and unrealized losses of $14.4 million from the held-to-maturity portfolio into the available-for-sale portfolio.
The amortized cost and fair value of Oriental’s investment securities at December 31, 2019, by contractual maturity, are shown in the
next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the
period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates
GNMA 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
GNMA certificates
Total due after 5 to 10 years
Due after 10 years
123
December 31, 2019
Available-for-sale
Amortized
Cost
Fair Value
(In thousands)
$
1,611 $
785
2,396
$
45,481 $
111,923
80,675
238,079
1,640
785
2,425
45,003
111,916
80,676
237,595
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
Other debt securities
Total due in less than one year
Due from 1 to 5 years
Obligations of US government-sponsored agencies
US Treasury 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
$
$
$
$
289,693 $
134,295
9,754
433,742
674,217
377,153 $
250
377,403
1,967 $
20,030
21,997
289,100
135,008
9,758
433,866
673,886
377,153
250
377,403
1,961
20,030
21,991
858
858
400,258
1,074,475 $
889
889
400,283
1,074,169
During the year ended December 31, 2019 Oriental sold $680.4 million available-for-sale mortgage-backed securities, at attractive
yields and terms and recognized a gain in the sale of $8.3 million, preparing for the Scotiabank PR & USVI Acquisition. During the
year ended 2018, Oriental also sold $17.8 million available-for-sale Government National Mortgage Association (“GNMA”)
certificates from its recurring mortgage loan origination and securitization activities. These sales did not realize any gains or losses
during such period. During the year ended 2017 Oriental sold $166.0 million available-for-sale mortgage-backed securities and $84.1
million of US Treasury securities and recorded a net gain on sale of securities of $6.9 million.
During the year ended December 31, 2019, Oriental retained securitized GNMA pools totaling $62.8 million amortized cost, at a yield
of 3.23% from its own originations, while during the year ended 2018 that amount totaled $56.8 million amortized cost, at a yield of
3.93%. During the year ended 2017, that amount totaled $74.9 million amortized cost, at a yield of 3.14% from its own originations.
During the year ended December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition recognizing available-for-sale
securities amounting to $574.6 million with an average yield of 1.79% and an average duration of 1.55 years. This portfolio is
comprised of US Treasury Notes, agency mortgage-backed-securities and agency CMO’s.
124
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Description
Sale Price
at Sale
Gross Gains Gross Losses
(In thousands)
Year Ended December 31, 2019
Book Value
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
Total
$
$
451,081 $
229,385
680,466 $
447,305 $
224,887
672,192 $
3,776 $
4,498
8,274 $
-
-
-
Description
Sale Price
at Sale
Gross Gains Gross Losses
(In thousands)
Year Ended December 31, 2018
Book Value
Sale of securities available-for-sale
Mortgage-backed securities
GNMA certificates
Total
$
$
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 $
-
-
-
-
125
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 at December 31, 2019 and 2018, aggregated by investment category and the length of time that individual securities have
been in a continuous unrealized loss position:
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of US Government and sponsored agencies
GNMA certificates
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
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 Treasury Securities
Amortized
Cost
December 31, 2019
12 months or more
Unrealized
Loss
(In thousands)
Fair
Value
$
35,417 $
259,099
1,967
19
$
296,502 $
387 $
1,415
6
-
1,808 $
35,030
257,684
1,961
19
294,694
Less than 12 months
Amortized
Cost
Unrealized
Loss
(In thousands)
Fair
Value
11,503
4,919
3,549
627
20,598 $
$
103
2
4
-
109 $
11,400
4,917
3,545
627
20,489
Amortized
Cost
Total
Unrealized
Loss
(In thousands)
Fair
Value
$
46,920 $
490 $
264,018
1,967
3,568
627
1,417
6
4
-
$
317,100 $
1,917 $
46,430
262,601
1,961
3,564
627
315,183
126
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
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 Treasury 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
$
$
Oriental performs valuations of its investment securities on a monthly basis. Moreover, Oriental conducts quarterly reviews to identify
and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value
associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in
other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be
recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the
yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows
expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment
analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while Oriental
believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing improvement,
including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or
conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.
All of the investments ($317.1 million, amortized cost) with an unrealized loss position at December 31, 2019 consist of securities
issued or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities that have a
127
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in
market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.
NOTE 5 - PLEDGED ASSETS
The following table shows a summary of pledged and not pledged assets at December 31, 2019 and 2018. Investment securities
available for sale are presented at fair value, and investment securities held-to-maturity, residential mortgage loans, commercial loans
and leases are presented at amortized cost:
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
Pledged auto loans and leases to secure:
Total pledged assets
Financial assets not pledged:
Investment securities
Residential mortgage loans
Commercial loans
Consumer loans
Auto loans and leases
Total assets not pledged
NOTE 6 - LOANS
December 31,
2019
2018
(In thousands)
204,068 $
1,775
323
191,908
398,074
487,181
423
322
141,162
629,088
803,317
880,591
518,473
45,175
129,152
692,800
1,182,272
3,076,463
$
$
676,095
1,706,981
1,529,642
504,437
329,972
275,451
651
140,123
416,225
-
1,925,904
637,509
354,868
1,414,054
373,814
1,148,535
$
$
$
$
4,747,127 $
3,928,780
Oriental’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as
"originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated among
acquired Scotiabank PR & USVI loans, acquired BBVAPR loans and acquired Eurobank loans.
The composition of Oriental’s loan portfolio at December 31, 2019 and 2018 was as follows:
128
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 Scotiabank PR & USVI loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Mortgage
Commercial
Consumer
Auto
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
Consumer
Auto
Total acquired Scotiabank PR & USVI loans, net
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
Auto
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC
310-30
Total acquired BBVAPR loans, net
129
December 31,
2019
2018
(In thousands)
$
577,416 $
1,667,494
361,638
1,277,732
3,884,280
(83,471)
3,800,809
8,965
3,809,774
322,179
193,192
112,757
191,015
819,143
1,130,964
212,866
8,539
41,571
1,393,940
2,213,083
668,809
1,597,588
348,980
1,129,695
3,745,072
(95,188)
3,649,884
7,740
3,657,624
-
-
-
-
-
-
-
-
-
-
-
2,141
20,794
135
23,070
(1,573)
21,497
2,546
23,988
4,435
30,969
(2,062)
28,907
411,531
117,694
1,790
531,015
492,890
182,319
14,403
689,612
(17,036)
(42,010)
513,979
535,476
647,602
676,509
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Eurobank loans:
Mortgage
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
Originated and Other Loans and Leases Held for Investment
48,617
29,041
724
78,382
(14,459)
63,923
2,812,482
6,622,256
19,591
6,641,847 $
63,392
47,826
846
112,064
(24,971)
87,093
763,602
4,421,226
10,368
4,431,594
$
Oriental’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial,
consumer, and auto and leasing.
The tables below present the aging of the recorded investment in gross originated and other loans held for investment at December 31,
2019 and 2018, by class of loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers
of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option
(but not the obligation) to repurchase, even when they elect not to exercise that option.
130
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2019
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
$
Mortgage
Traditional (by
origination year):
Up to the year
2002
Years 2003 and
2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011,
2012, 2013
Years 2014 to
present
Non-traditional
Loss mitigation
program
Mortgage secured
personal loans
GNMA's buy-back
option program
Commercial
Commercial secured
by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
US Loan Program
Other commercial
and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
US Loan Program
71 $
669 $
1,362 $
2,102 $
32,194 $
34,296 $
248
81
77
277
-
343
-
849
-
8,436
9,285
2,772
1,146
953
665
537
232
6,974
112
5,452
12,538
1,784
1,486
898
4,637
2,709
2,128
59,280
29,905
45,339
63,917
32,614
47,467
1,279
1,944
47,358
49,302
2,336
3,216
93,578
96,794
1,170
10,315
972
7,641
18,928
1,402
18,138
1,084
21,529
40,751
136,762
444,416
8,553
72,668
525,637
138,164
462,554
9,637
94,197
566,388
-
-
-
-
223
223
-
9,285
-
12,538
10,805
29,733
10,805
51,556
-
525,860
10,805
577,416
-
-
30
839
-
-
-
869
-
-
2,934
4,370
209
-
7,513
8,382
-
-
500
367
-
-
-
867
-
-
250
90
-
-
340
1,207
7,264
-
4,928
2,855
-
-
-
15,047
-
-
1,550
345
-
-
1,895
16,942
131
7,264
-
5,458
4,061
-
-
-
16,783
-
-
4,734
4,805
209
-
9,748
26,531
231,379
137,610
200,380
224,468
3,337
17,083
25,459
839,716
238,643
137,610
205,838
228,529
3,337
17,083
25,459
856,499
137,350
190,741
66,799
115,067
44,154
247,136
801,247
1,640,963
137,350
190,741
71,533
119,872
44,363
247,136
810,995
1,667,494
-
-
-
-
88
294
630
-
1,788
2,418
-
-
2,418
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2019
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
Total Past
Due
(In thousands)
Loans 90+
Days Past
Due and
Still
Current
Total Loans Accruing
-
-
-
-
-
-
-
2,418
Consumer
Credit cards
Overdrafts
Personal lines of
credit
Personal loans
Cash collateral
personal loans
$
800 $
51
243 $
-
546 $
-
1,589 $
51
26,025 $
165
27,614 $
216
153
4,796
149
-
2,090
5
9
1,262
294
162
1,616
1,778
8,148
306,539
314,687
448
16,895
17,343
10,398
117,787
206,272 $ 3,678,008 $ 3,884,280 $
351,240
1,159,945
361,638
1,277,732
Auto and leasing
Total
$
5,949
72,211
95,827 $
2,338
31,351
47,434 $
2,111
14,225
63,011 $
132
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2018
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
$
Mortgage
Traditional (by
origination year):
Up to the year
2002
Years 2003 and
2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011,
2012, 2013
Years 2014, 2015,
2016, 2017 and 2018
Non-traditional
Loss mitigation
program
Mortgage secured
personal loans
GNMA's buy-back
option program
Commercial
Commercial secured
by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
US Loan Program
Other commercial
and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
US Loan Program
77 $
1,516 $
2,707 $
4,300 $
36,344 $
40,644 $
168
91
-
255
255
253
-
931
-
10,793
11,724
9
-
2,412
552
1,693
1,059
328
483
8,043
116
6,258
14,417
-
-
11,733
14,417
-
-
-
1,641
-
-
-
1,641
-
-
917
571
-
-
1,488
3,129
-
-
1,430
463
-
-
-
1,893
-
-
-
546
-
-
546
2,439
5,632
3,531
5,074
6,677
8,697
1,462
33,780
3,085
19,389
56,254
8,135
4,083
7,022
7,991
67,707
35,004
49,213
52,781
75,842
39,087
56,235
60,772
9,278
104,429
113,707
1,945
139,500
141,445
42,754
3,201
484,978
11,072
527,732
14,273
36,440
70,393
106,833
82,395
566,443
648,838
-
9
241
250
-
-
-
56
270
-
494
-
2,223
2,717
-
-
19,721
-
19,721
102,125
566,684
668,809
2,717
-
1,200
6,632
10,674
-
-
-
18,506
-
-
6,937
1,934
46
-
8,917
27,423
289,052
68,413
200,831
210,251
4,184
19,009
3,189
794,929
289,052
69,613
207,463
220,925
4,184
19,009
3,189
813,435
179,885
156,410
81,030
88,000
49,633
220,278
775,236
1,570,165
179,885
156,410
87,967
89,934
49,679
220,278
784,153
1,597,588
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
19,721
75,975
-
1,200
5,202
8,570
-
-
-
14,972
-
-
6,020
817
46
-
6,883
21,855
133
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2018
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
$
725 $
10
363 $
-
411 $
-
1,499 $
10
26,535 $
204
28,034 $
214
57
3,966
74
11
1,740
339
22
1,262
3
90
1,827
1,917
6,968
296,151
303,119
416
15,280
15,696
-
-
-
-
-
Consumer
Credit cards
Overdrafts
Personal lines of
credit
Personal loans
Cash collateral
personal loans
Auto and leasing
Total
$
4,832
58,094
77,788 $
2,453
27,945
47,254 $
1,698
13,494
113,022 $
8,983
99,533
339,997
1,030,162
348,980
1,129,695
238,064 $ 3,507,008 $ 3,745,072 $
-
-
2,717
At December 31, 2019, and 2018, Oriental had a carrying balance of $92.6 million and $91.4 million, respectively, in current status, in
originated and other loans held for investment granted to the Puerto Rico government, including its instrumentalities, public
corporations and municipalities, as part of the institutional commercial loan segment. All originated and other loans granted to the
Puerto Rico government are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or
amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing
municipality are pledged for the payment of its general obligations.
Acquired Loans
Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20. We
have acquired loans in the acquisitions of Scotiabank, BBVAPR and Eurobank.
Acquired Scotiabank PR & USVI Loans
Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Credit cards, retail and commercial revolving lines of credits, floor plans and performing loans acquired, except for those acquired
with credit discount and showed specific credit risk indicators, are accounted for under the guidance of ASC 310-20, which requires
that any contractually required loan payment receivable in excess of Oriental’s initial investment in the loans be accreted into interest
income on a level-yield basis over the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when
past due in accordance with Oriental’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued.
Acquired Scotiabank PR & USVI loans that were accounted for under the provisions of ASC 310-20 are removed from the acquired
loan category at the end of the reporting period upon refinancing, renewal or normal re-underwriting.
The following tables present the aging of the recorded investment in gross acquired Scotiabank PR & USVI loans accounted for under
ASC 310-20 as of December 31, 2019, by class of loans:
134
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2019
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
Mortgage
Traditional (by
origination year)
Up to year 2002 $
Year 2003 and
2004
Year 2005
Year 2006
Year 2007, 2008,
2009
Year 2010, 2011,
2012, 2013
Year 2014 to
present
GNMA's buy-
back option
Commercial
Commercial secured
by real estate
Retail
$
Other commercial
and industrial
Retail
Corporate
Consumer
Credit cards
Personal lines of
credit
Personal loans
Auto
Total
$
- $
- $
- $
- $
383 $
383 $
-
-
-
-
-
-
-
-
-
-
-
-
19
478
70
567
-
567
-
-
-
-
-
-
-
-
-
-
1,055
1,018
3,331
1,055
1,018
3,331
19
21,458
21,477
478
144,881
145,359
70
567
85,110
257,236
85,180
257,803
64,376
64,376
64,376
64,943
-
257,236
64,376
322,179
125 $
125
79 $
79
1,684 $
1,684
1,888 $
1,888
32,993 $
32,993
34,881 $
34,881
23
-
23
148
161
380
11
552
105
805 $
13
-
13
92
75
795
-
795
2,479
831
-
831
2,719
153,078
4,402
157,480
190,473
153,909
4,402
158,311
193,192
-
236
28,538
28,774
20
28
123
40
822 $
212
1
213
15
67,083 $
612
40
888
160
68,710 $
50,224
33,107
111,869
190,855
750,433 $
50,836
33,147
112,757
191,015
819,143 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
135
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)
Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660
acquired at a premium are accounted for under the guidance of ASC 310-20, which requires that any contractually required loan
payment receivable in excess of Oriental’s initial investment in the loans be accreted into interest income on a level-yield basis over
the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with
Oriental’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued. Acquired BBVAPR loans
that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting
period upon refinancing, renewal or normal re-underwriting.
The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20
as of December 31, 2019 and 2018, by class of loans:
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2019
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
Commercial
Commercial secured
by real estate
Retail
Floor plan
$
Other commercial
and industrial
Retail
Floor plan
Consumer
Credit cards
Personal loans
Auto
Total
$
-
- $
-
48
-
48
48
477
22
499
20
567 $
-
- $
-
-
764 $
764
-
764 $
764
-
21 $
21
-
785 $
785
18
-
18
18
99
-
99
21
138 $
26
-
26
790
92
-
92
856
1,264
-
1,264
1,285
1,356
-
1,356
2,141
350
22
372
30
1,192 $
926
44
970
71
1,897 $
17,888
1,936
19,824
64
21,173 $
18,814
1,980
20,794
135
23,070 $
-
-
-
-
-
-
-
-
-
-
-
-
136
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
30-59 Days 60-89 Days
Past Due
Past Due
90+ Days
Past Due
December 31, 2018
Total Past
Loans 90+
Days Past
Due and
Still
Due
Current
Total Loans Accruing
(In thousands)
Commercial
Commercial secured
by real estate
Retail
Floor plan
$
Other commercial
and industrial
Retail
Floor plan
Consumer
Credit cards
Personal loans
Auto
Total
$
- $
-
-
30
-
30
30
499
64
563
405
998 $
- $
-
-
54 $
888
942
54 $
888
942
- $
94
94
54 $
982
1,036
11
-
11
11
147
32
179
241
431 $
8
-
8
950
380
18
398
200
1,548 $
49
-
49
991
1,461
-
1,461
1,555
1,510
-
1,510
2,546
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 $
-
-
-
-
-
-
-
-
-
-
-
-
Acquired Scotiabank PR & USVI Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by
analogy)
Acquired Scotiabank loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing loans
that did not showed specific credit risk indicators are accounted for by Oriental in accordance with ASC 310-30.
The carrying amount corresponding to acquired Scotiabank PR & USVI loans with deteriorated credit quality, including those
accounted under ASC 310-30 by analogy, in the statements of financial condition at December 31, 2019 is as follows:
December 31,
2019
2018
(In thousands)
$
2,147,249
$
294,424
1,852,825
458,885
1,393,940
-
$
1,393,940
$
-
-
-
-
-
-
-
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
137
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2019 and 2018, Oriental had $41.4 million and $44.5 million, respectively, in loans granted to Puerto Rico
municipalities as part of its acquired Scotiabank loans and BBVAPR loans accounted for under ASC 310-30. These loans are
primarily secured municipal general obligations.
The following tables describe the accretable yield and non-accretable discount activity of acquired Scotiabank PR & USVI loans
accounted for under ASC 310-30 for the year ended December 31, 2019:
Accretable Yield Activity:
Balance at beginning of year
Additions
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
Additions
Change in actual and expected losses
Transfer from accretable yield
Balance at end of year
Year Ended December 31, 2019
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
$
- $
- $
- $
325,731
-
-
-
129,182
-
-
-
3,715
-
-
-
$
325,731 $
129,182 $
3,715 $
- $
257
-
-
-
257 $
-
458,885
-
-
-
458,885
$
- $
- $
- $
217,113
-
-
73,198
-
-
3,720
-
-
$
217,113 $
73,198 $
3,720 $
- $
393
-
-
393 $
-
294,424
-
-
294,424
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Acquired BBVAPR loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing auto
loans with FICO scores over 660 acquired at a premium, are accounted for by Oriental in accordance with ASC 310-30.
The carrying amount corresponding to acquired BBVAPR loans with deteriorated credit quality, including those accounted under ASC
310-30 by analogy, in the statements of financial condition at December 31, 2019 and 2018 is as follows:
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
138
December 31,
2019
2018
(In thousands)
$
1,086,367
$
340,466
745,901
214,886
531,015
17,036
1,304,545
345,423
959,122
269,510
689,612
42,010
$
513,979
$
647,602
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for
under ASC 310-30 for the years ended December 31, 2019, 2018 and 2017:
Year Ended December 31, 2019
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
$
232,199 $
(23,871)
(212)
36,508 $
(10,312)
23,080
243 $
(430)
(19)
560 $
(739)
739
269,510
(35,352)
23,588
Transfer (to) from non-accretable discount
(12,033)
(30,653)
253
(427)
(42,860)
Balance at end of year
$
196,083 $
18,623 $
47 $
133 $
214,886
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer from (to) accretable yield
Balance at end of year
$
$
291,887 $
(27,741)
12,033
276,179 $
10,346 $
(19,295)
30,653
21,704 $
24,245 $
(169)
(253)
23,823 $
18,945 $
(612)
427
18,760 $
345,423
(47,817)
42,860
340,466
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer from (to) non-accretable discount
Balance at end of year
$
$
Year Ended December 31, 2018
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
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 $
(871)
484
62
560 $
308,913
(44,639)
9,269
(4,033)
269,510
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
$
$
299,501 $
(6,665)
(949)
291,887 $
10,596 $
(4,241)
3,991
10,346 $
23,050 $
142
1,053
24,245 $
19,284 $
(277)
(62)
18,945 $
352,431
(11,041)
4,033
345,423
139
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2017
Mortgage
Commercial
Auto
(In thousands)
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
$
292,115 $
(30,205)
2
50,366 $
(20,572)
22,250
8,538 $
(6,339)
170
3,682 $
(1,841)
143
354,701
(58,957)
22,565
Transfer from (to) non-accretable discount
(3,414)
(5,280)
397
(1,099)
(9,396)
Balance at end of year
$
258,498 $
46,764 $
2,766 $
885 $
308,913
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer (to) from accretable yield
Balance at end of year
Acquired Eurobank Loans
$
$
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
The carrying amount of acquired Eurobank loans at December 31, 2019 and 2018 is as follows:
December 31,
2019
2018
(In thousands)
Contractual required payments receivable
$
117,107 $
156,722
Less: Non-accretable discount
Cash expected to be collected
Less: Accretable yield
Carrying amount, gross
Less: Allowance for loan and lease losses
Carrying amount, net
4,285
112,822
34,441
78,381
14,458
63,923 $
2,959
153,763
41,699
112,064
24,971
87,093
$
The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the years ended
December 31, 2019, 2018 and 2017:
140
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2019
Mortgage
Commercial
Leasing
(In thousands)
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
$
38,389 $
(4,999)
2,578
(1,947)
3,310 $
(4,611)
2,270
(549)
- $
(14)
(145)
159
- $
- $
(164)
273
(109)
41,699
(9,788)
4,976
(2,446)
- $
34,441
Change in expected cash flows
Transfer (to) from non-accretable discount
Balance at end of year
$
34,021 $
420 $
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
$
$
2,826 $
(3,051)
1,947
1,722 $
- $
1,928
549
2,477 $
- $
159
(159)
- $
133 $
(156)
109
86 $
2,959
(1,120)
2,446
4,285
Year Ended December 31, 2018
Mortgage
Commercial
Leasing
(In thousands)
Consumer
Total
6,751
(6,430)
5,023
(2,034)
3,310 $
276 $
(2,310)
2,034
- $
- $
(52)
(329)
381
- $
- $
381
(381)
- $
- $
(389)
700
(311)
- $
235 $
(413)
311
133 $
49,672
(12,835)
4,265
597
41,699
5,845
(2,289)
(597)
2,959
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer from (to) non-accretable discount
Balance at end of year
$
$
42,921 $
(5,964)
(1,129)
2,561
38,389 $
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
$
$
5,334 $
53
(2,561)
2,826 $
141
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2017
Mortgage
Commercial
Leasing
(In thousands)
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
$
48,033 $
(7,262)
16,475 $
(12,985)
Change in expected cash flows
Transfer from (to) non-accretable discount
Balance at end of year
$
242
1,908
42,921 $
1,881
1,380
6,751 $
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
$
$
8,452 $
(1,210)
(1,908)
5,334 $
3,880 $
(2,224)
(1,380)
276 $
- $
(30)
(217)
247
- $
- $
247
(247)
- $
- $
(283)
759
(476)
- $
64,508
(20,560)
2,665
3,059
49,672
8 $
(249)
476
235 $
12,340
(3,436)
(3,059)
5,845
142
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, 2019 and
2018:
December 31,
2019
2018
(In thousands)
1,117 $
1,784
1,486
898
1,418
2,244
876
9,823
972
7,940
18,735
7,264
9,092
5,654
8,024
30,034
4,484
4,362
209
9,055
39,089
546
-
15
3,846
294
4,701
14,239
76,764 $
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
$
$
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
Corporate
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
143
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Scotiabank PR & USVI loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate
Retail
Other commercial and industrial
Retail
Consumer
Personal lines of credit
Personal loans
Auto
Total non-accrual acquired Scotiabank PR & USVI loans accounted for under ASC 310-20
Acquired BBVAPR loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate
Retail
Floor plan
Other commercial and industrial
Retail
Consumer
Credit cards
Personal loans
Auto
Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20
Total non-accrual loans
$
$
December 31,
2019
2018
(In thousands)
$
1,922 $
1,922
-
-
-
-
-
-
-
-
-
54
888
942
8
950
805
2,727
212
2
214
26
2,967
-
$
764
764
26
790
350
22
372
30
1,192
80,923 $
380
18
398
200
1,548
119,726
Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the
application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using
estimated cash flow analyses or are accounted under the cost recovery method.
Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing
loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 12 months or more past
due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. In
addition, these loans are excluded from the impairment analysis.
At December 31, 2019 and 2018, loans whose terms have been extended and which are classified as troubled-debt restructurings that
are not included in non-accrual loans amounted to $103.7 million and $112.9 million, respectively, as they are performing under their
new terms.
144
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2019 and 2018, loans that are current in their monthly payments, but placed in non-accrual due to credit deterioration
amounted to $17.6 million and $21.2 million, respectively.
Impaired Loans
Oriental evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total
investment in impaired commercial loans that were individually evaluated for impairment was $61.1 million and $82.0 million at
December 31, 2019 and 2018, respectively. The impairments on these commercial loans were measured based on the fair value of
collateral or the present value of cash flows, including those identified as troubled-debt restructurings. The allowance for loan and
lease losses for these impaired commercial loans amounted to $8.2 million and $8.4 million at December 31, 2019 and 2018,
respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $71.2 million and
$84.2 million at December 31, 2019 and 2018, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings
was measured using the present value of cash flows. The allowance for loan losses for these impaired mortgage loans amounted to
$6.9 million and $10.2 million at December 31, 2019 and 2018, respectively.
Originated and Other Loans and Leases Held for Investment
Oriental’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for
investment that were individually evaluated for impairment and the related allowance for loan and lease losses at December 31, 2019
and 2018 are as follows:
Impaired loans with specific allowance:
Commercial
Residential impaired and troubled-debt restructuring
Impaired loans with no specific allowance:
Commercial
Total investment in impaired loans
December 31, 2019
Unpaid
Principal
Recorded
Investment Allowance
Related
Coverage
(In thousands)
$
33,454
$
78,666
28,555
$
71,196
8,215
6,874
39,109
151,229 $
31,895
131,646 $
$
N/A
15,089
29%
10%
0%
11%
December 31, 2018
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
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%
Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Oriental’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually
evaluated for impairment and the related allowance for loan and lease losses at December 31, 2019 and 2018 are as follows:
145
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
Unpaid
Principal
December 31, 2019
Recorded
Investment Allowance
(In thousands)
Related
Coverage
926 $
678 $
2
- $
926 $
-
678 $
N/A
2
0%
0%
0%
Unpaid
Principal
December 31, 2018
Recorded
Investment Allowance
(In thousands)
Specific
Coverage
926 $
747 $
- $
926 $
-
747 $
14
N/A
14
2%
0%
2%
$
$
$
$
$
$
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
Oriental’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and
their related allowance for loan and lease losses at December 31, 2019 and 2018 are as follows:
Impaired loan pools with specific allowance:
Mortgage
Commercial
Auto
Total investment in impaired loan pools
Impaired loan pools with specific allowance:
Mortgage
Commercial
Auto
Total investment in impaired loan pools
December 31, 2019
Unpaid
Principal
Recorded
Investment
Allowance
(In thousands)
Coverage
to Recorded
Investment
400,964 $
87,103
3,947
492,014 $
411,531 $
84,117
1,790
497,438 $
9,376
6,713
947
17,036
2%
8%
53%
3%
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%
$
$
$
$
146
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The tables above only present information with respect to acquired BBVAPR loan pools accounted for under ASC 310-30 if there is a
recorded impairment to such loan pools and a specific allowance for loan losses.
Acquired Eurobank Loans
Oriental’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan
and lease losses as of December 31, 2019 and 2018 are as follows:
Impaired loan pools with specific allowance:
Mortgage
Commercial
Total investment in impaired loan pools
Impaired loan pools with specific allowance
Mortgage
Commercial
Consumer
Total investment in impaired loan pools
December 31, 2019
Unpaid
Principal
Recorded
Investment Allowance
(In thousands)
Coverage
to Recorded
Investment
53,090 $
17,176
70,266 $
49,366 $
17,142
66,508 $
12,278
2,180
14,458
25%
13%
22%
December 31, 2018
Unpaid
Principal
Recorded
Investment Allowance
(In thousands)
Specific
Coverage
to Recorded
Investment
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%
$
$
$
$
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.
147
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, 2019, 2018 and 2017:
2019
2018
2017
Year Ended December 31,
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
(In thousands)
Originated and other
loans held for investment:
Impaired loans with
specific allowance
Commercial
Residential troubled-
debt restructuring
Impaired loans with no
specific allowance
Commercial
Total interest
income from impaired
loans
$
503 $
41,868 $
1,624 $
44,727 $
1,538 $
25,797
2,661
73,173
2,556
84,494
3,301
87,414
1,086
32,269
1,091
26,199
875
36,666
$
4,250 $
147,310 $
5,271 $
155,420 $
5,714 $ 149,877
Acquired loans accounted
for under ASC 310-20:
Impaired loans with
specific allowance
Commercial
Total interest
income from impaired
loans
$
$
- $
701 $
- $
747 $
- $
794
4,250 $
148,011 $
5,271 $
156,167 $
5,714 $ 150,671
148
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Modifications
The following tables present the troubled-debt restructurings in all loan portfolios during the years ended December 31, 2019, 2018
and 2017.
Year Ended December 31, 2019
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
Pre-
Modification
Weighted
Average Rate
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
Auto
$
148
5
370
22
19,130
5.85%
2,070
5,357
319
7.23%
15.69%
7.29%
376
$
56
66
70
17,991
2,070
5,398
326
5.09%
6.05%
11.50%
8.97%
345
67
74
44
149
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
Pre-
Modification
Weighted
Average Rate
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
Auto
$
143
23
174
2
19,029
26,019
2,313
40
5.09%
5.75%
13.24%
10.42%
342
$
118
51
37
18,237
25,973
2,332
40
4.41%
5.64%
9.86%
10.28%
314
136
61
32
Year Ended December 31, 2017
Pre-
Modification
Outstanding
Recorded
Investment
Number of
contracts
Pre-
Modification
Weighted
Average Rate
Pre-
Modification
Weighted
Average
Term (in
Months)
(Dollars in thousands)
Post-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average
Term (in
Months)
Post-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
Auto
$
85
24
107
9
10,441
13,828
1,391
134
6.23%
6.05%
11.68%
7.24%
390
$
57
62
66
10,343
13,829
1,430
135
4.40%
5.73%
10.85%
11.75%
384
62
69
37
The following table presents troubled-debt restructurings for which there was a payment default during the years ended December 31,
2019, 2018,and 2017:
Year Ended December 31,
2019
2018
2017
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(Dollars in thousands)
Mortgage
Commercial
Consumer
Auto
29
$
-
$
77
$
3
$
3,597
-
1,118
51
23
$
4
$
28
$
-
$
3,262
2,141
341
-
34
$
5
$
20
$
-
$
3,129
452
249
-
150
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 loan grades based on relevant
information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss
experience, and the results of periodic credit reviews of individual loans.
Oriental uses the following definitions for loan grades:
Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent
risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.
Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution’s credit position at some future date.
Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, questionable and improbable.
Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is
not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not
practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
loans.
As of December 31, 2019 and 2018, and based on the most recent analysis performed, the loan grading of gross originated and other
loans, Scotiabank PR & USVI and BBVAPR acquired loans accounted for under ASC 310-20 subject to loan grade by class of loans
is as follows:
151
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2019
Loan Grades
Balance
Outstanding
Pass
Special
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
US Loan Program
$
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
US Loan Program
Total
Scotiabank PR & USVI
Commercial - acquired loans (under
ASC 310-20)
(under ASC 310-20)
Commercial secured by real estate:
Retail
Other commercial and industrial:
Retail
Corporate
Total Scotiabank PR & USVI
commercial - acquired loans
BBVAPR Commercial - acquired
loans (under ASC 310-20)
(under ASC 310-20)
Commercial secured by real estate:
Floor plan
Other commercial and industrial:
Retail
Total BBVAPR commercial -
acquired loans
238,643 $
137,610
205,838
228,529
3,337
17,083
25,459
856,499
214,474 $
128,169
153,984
212,069
3,337
17,083
25,459
754,575
137,350
190,741
71,533
119,872
44,363
247,136
810,995
1,667,494
134,982
190,741
63,540
115,551
42,490
237,286
784,590
1,539,165
16,905 $
349
32,624
5,957
-
-
-
55,835
2,368
-
2,518
84
1,664
9,850
16,484
72,319
7,264 $
9,092
19,230
10,503
-
-
-
46,089
-
-
5,475
4,237
209
-
9,921
56,010
34,881
34,881
33,306
33,306
153,909
4,402
158,311
153,769
4,402
158,171
35
35
-
-
-
1,504
1,504
39
-
39
193,192
191,477
35
1,543
785
785
1,356
1,356
21
21
1,356
1,356
2,141
1,377
-
-
-
-
-
764
764
-
-
764
152
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
36
36
101
-
101
137
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2019
Loan Grades
Balance
Special
Outstanding
Pass
Mention
Substandard Doubtful
Loss
(In thousands)
Retail - originated and other loans
held for investment
Mortgage:
Traditional
Non-traditional
Loss mitigation program
Mortgage 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 (accounted
for under ASC 310-20) - Scotiabank
PR & USVI
Mortgage:
Traditional
GNMA's buy-back option program
Consumer:
Credit cards
Personal lines of credit
Personal loans
Auto
Retail - acquired loans (accounted
for under ASC 310-20) - BBVPR
Consumer:
Credit cards
Personal loans
Auto
462,554
9,637
94,197
223
10,805
577,416
452,239
8,665
86,556
223
-
547,683
27,614
216
1,778
314,687
17,343
361,638
1,277,732
2,216,786
27,068
165
1,769
313,425
17,049
359,476
1,263,506
2,170,665
257,803
64,376
322,179
28,774
50,836
33,147
112,757
191,015
303,772
257,803
-
257,803
28,774
50,624
33,147
112,545
191,000
303,545
18,814
1,980
20,794
135
20,929
18,464
1,958
20,422
106
20,528
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,315
972
7,641
-
10,805
29,733
546
51
9
1,262
294
2,162
14,226
46,121
-
64,376
64,376
-
212
-
212
15
227
350
22
372
29
401
$ 4,726,493 $ 4,484,559 $
72,354 $
169,443 $
153
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
137 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Loan Grades
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
US Loan Program
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
US Loan Program
Total
Commercial - acquired loans
(under ASC 310-20)
Commercial secured by real estate:
Retail
Floor plan
Other commercial and industrial:
Retail
Total
$
289,052 $
246,711 $
26,544 $
15,797 $
-
$
69,613
207,463
220,925
4,184
19,009
3,189
59,509
151,638
195,213
2,890
19,009
3,189
813,435
678,159
179,885
156,410
87,967
89,934
49,679
220,278
784,153
1,597,588
154,629
156,410
63,876
86,882
47,092
220,278
729,167
1,407,326
-
32,638
3,996
-
-
-
63,178
25,256
-
13,737
318
2,541
-
41,852
105,030
54
982
1,036
1,510
1,510
2,546
-
94
94
1,510
1,510
1,604
-
-
-
-
-
-
10,104
23,187
21,716
1,294
-
-
72,098
-
-
10,354
2,734
46
-
13,134
85,232
54
888
942
-
-
942
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
154
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2018
Loan Grades
Balance
Outstanding
Special
Mention
Pass
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
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
527,732
14,273
106,833
250
19,721
668,809
493,952
11,188
87,444
250
-
592,834
28,034
214
1,917
303,119
15,696
348,980
1,129,695
2,147,484
27,623
204
1,895
301,857
15,693
347,272
1,116,201
2,056,307
21,822
2,166
23,988
4,435
28,423
21,442
2,148
23,590
4,235
27,825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
$ 3,776,041 $ 3,493,062 $
105,030 $
177,949 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
155
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, 2019 and 2018 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
Auto
Total allowance for acquired BBVAPR loans and lease losses
Acquired Eurobank loans:
Mortgage
Commercial
Consumer
Total allowance for acquired Eurobank loan and lease losses
December 31,
2019
2018
(In thousands)
$
8,727 $
25,989
16,882
31,873
83,471
4
1,564
5
1,573
9,376
6,713
947
17,036
18,609
12,279
2,180
-
14,459
19,783
30,326
15,571
29,508
95,188
22
1,905
135
2,062
15,225
20,641
6,144
42,010
44,072
15,382
9,585
4
24,971
Total allowance for loan and lease losses
$
116,539 $
164,231
Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses
based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses policy provides for a detailed
quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral,
current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available
information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond Oriental’s
control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is
deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the
loans exceed the remaining credit discount recorded at the time of acquisition.
Loans acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were recognized at fair value as of
December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at
acquisition date. To the extent credit deterioration occurs after the date of acquisition, Oriental would record an allowance for loan and
lease losses. Management determined that there was no need to record an allowance for loan and lease losses on loans acquired in the
Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 as of December 31, 2019. Considering the short period elapsed
from the acquisition date, Oriental does not believe that the difference between cash flows expected to be collected on the loans
156
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 and those anticipated at December 31, 2019
need further assessment.
Allowance for Originated and Other Loan and Lease Losses Held for Investment
The following tables present the activity in our allowance for loan and lease losses and the related recorded investment of the
originated and other loans held for investment portfolio by segment for the periods indicated:
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, 2019
Mortgage
Commercial Consumer
(In thousands)
Auto and
Leasing
Total
$
$
19,783 $
(18,564)
1,533
5,975
8,727 $
30,326 $
(12,073)
1,104
6,632
25,989 $
15,571 $
(18,910)
2,014
18,207
16,882 $
29,508 $
(47,278)
18,694
30,949
31,873 $
95,188
(96,825)
23,345
61,763
83,471
Year Ended December 31, 2018
Mortgage
Commercial Consumer
Auto and
Leasing
Total
(In thousands)
Allowance for loan and lease losses for
originated and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for originated and other loan
and lease losses
Balance at end of year
$
$
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
25,567 $
(42,685)
19,344
14,989
15,571 $
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
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
$
$
17,344 $
(6,623)
585
9,133
20,439 $
8,995 $
(7,684)
1,281
27,666
30,258 $
13,067 $
(13,641)
1,209
19,463 $
(33,908)
12,314
15,819
16,454 $
27,698
25,567 $
58,869
(61,856)
15,389
80,316
92,718
157
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Mortgage
Commercial
Consumer
Auto and
Leasing
Total
December 31, 2019
(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
$
6,874 $
1,853
8,215 $
17,774
- $
16,882
- $
31,873
Total ending allowance balance $
8,727
$
25,989
$
16,882
$
31,873
$
15,089
68,382
83,471
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
$
71,196 $
506,220
577,416 $
60,450 $
1,607,044
1,667,494 $
- $
361,638
361,638 $
- $
1,277,732
1,277,732 $
131,646
3,752,634
3,884,280
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
$
10,186 $
9,597
8,434 $
21,892
- $
15,571
- $
29,508
Total ending allowance balance $
19,783
$
30,326
$
15,571
$
29,508
$
18,620
76,568
95,188
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
$
84,174 $
584,635
668,809 $
81,229 $
1,516,359
1,597,588 $
- $
348,980
348,980 $
- $
1,129,695
1,129,695 $
165,403
3,579,669
3,745,072
158
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for BBVAPR Acquired Loan Losses
Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in
our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated:
Year Ended December 31, 2019
Commercial Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
$
$
22
$
(123)
6
1,905
$
(1,525)
353
135
$
(220)
250
2,062
(1,868)
609
99
831
4
$
1,564
$
(160)
5
$
770
1,573
Year Ended December 31, 2018
Commercial Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
(Recapture) provision for acquired
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)
22 $
659
1,905 $
(919)
135 $
(297)
2,062
$
$
159
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
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
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
December 31, 2019
Commercial
Consumer
Auto
Total
(In thousands)
$
$
$
$
2 $
2
4 $
678 $
1,463
2,141 $
- $
1,564
1,564 $
- $
20,794
20,794 $
- $
5
5 $
- $
135
135 $
2
1,571
1,573
678
22,392
23,070
December 31, 2018
Commercial Consumer
Auto
Total
(In thousands)
14 $
8
22 $
747 $
1,799
2,546 $
- $
1,905
1,905 $
- $
23,988
23,988 $
- $
135
135 $
- $
4,435
4,435 $
14
2,048
2,062
747
30,222
30,969
$
$
$
$
160
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For loans accounted for under ASC 310-30, as part of the evaluation of actual versus expected cash flows, Oriental assesses on a
quarterly basis the credit quality of these loans based on delinquency, severity factors and loan gradings, among other assumptions.
Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through
the end of the reporting period.
During the second and third quarter of 2019, Oriental decided to sell mostly non-performing loans increasing the provision of acquired
BBVAPR loans accounted under ASC 310-30 by $20.8 million and $8.7 million, respectively.
The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR
loan portfolio accounted for under ASC 310-30 for the periods indicated:
Year Ended December 31, 2019
Mortgage
Commercial
Consumer
(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
$
15,225
$
20,641
$
-
$
6,144
42,010
Provision (recapture) for acquired
BBVAPR
loans and lease losses accounted for under ASC
310-30
Allowance de-recognition
Balance at end of year
14,719
(28,647)
$
6,713
20,115
(25,964)
$
9,376
(2,928)
(2,269)
947
31,906
(56,880)
17,036
-
-
- $
$
161
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
Mortgage
Commercial
Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for
under
ASC 310-30:
Balance at beginning of year
$
14,085
$
23,691
$
18
$
7,961
$
45,755
Provision (recapture) for acquired
BBVAPR loans
and lease losses accounted for under ASC
310-30
Allowance de-recognition
1,360
(4,410)
1,331
(191)
(887)
(930)
1,786
(5,531)
(18)
-
Balance at end of year
$
15,225
$
20,641
$
-
$
6,144
$
42,010
Mortgage
Commercial
Consumer
Auto
Total
Year Ended December 31, 2017
(In thousands)
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
9,758
(9,519)
3,408
(369)
24,681
(9,982)
(94)
11,497
18
-
23,452
31,056
4,922
2,682
$
$
$
$
$
-
Balance at end of year
$
14,085
$
23,691
$
18
$
7,961
$
45,755
Allowance for Acquired Eurobank Loan Losses
The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2019, 2018 and
2017 were as follows:
Year Ended December 31, 2019
Mortgage
Commercial Consumer
Total
(In thousands)
Allowance for loan and lease losses for acquired Eurobank
loans:
Balance at beginning of year
Provision (recapture) for loan and lease losses
Allowance de-recognition
Balance at end of year
$
$
$
15,382
3,588
(6,691) $
$
12,279
9,585
$
(1,235)
(6,170) $
$
2,180
$
4
-
(4)
$
-
24,971
2,353
(12,865)
14,459
162
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2018
Mortgage
Commercial Consumer
Total
(In thousands)
Allowance for loan and lease losses for acquired Eurobank
loans:
Balance at beginning of year
Provision for acquired Eurobank loan and lease losses
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 Eurobank loans:
Balance at beginning of year
Provision for acquired Eurobank loan and lease losses
Allowance de-recognition
Balance at end of year
$
$
NOTE 8- FDIC SHARED-LOSS AGREEMENTS
$
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
On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a
payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the
anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the
end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the years ended
December 31, 2019, 2018, and 2017:
FDIC indemnification asset:
Balance at beginning of year
FDIC indemnification asset benefit
Shared-loss termination settlement
Balance at end of year
True-up payment obligation:
Balance at beginning of year
Shared-loss termination settlement
Balance at end of year
2019
Year Ended December 31,
2018
(In thousands)
2017
$
$
$
$
- $
-
-
- $
- $
-
- $
-
-
-
-
-
-
-
$
$
$
$
14,411
1,403
(15,814)
-
26,786
(26,786)
-
163
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental recognized an FDIC shared-loss benefit in the consolidated statements of operations, which consists of the following, for the
years ended December 31, 2019, 2018 and 2017:
FDIC indemnification asset benefit
Change in true-up payment obligation
Reimbursement to FDIC for recoveries
Total FDIC shared-loss benefit
NOTE 9 — FORECLOSED REAL ESTATE
2019
Year Ended December 31,
2018
(In thousands)
2017
$
$
- $
-
-
- $
- $
-
-
- $
(1,403)
-
-
(1,403)
The following tables present the activity related to foreclosed real estate for the years ended December 31, 2019, 2018 and 2017:
Balance at beginning of year
Decline in value
Additions
Sales
Balance at end of year
NOTE 10 — PREMISES AND EQUIPMENT
Year Ended December 31,
2019
2018
2017
(In thousands)
$
$
33,768 $
(4,762)
21,545
(20,642)
29,909 $
44,174 $
(5,757)
20,011
(24,660)
33,768 $
47,520
(6,560)
22,812
(19,598)
44,174
Premises and equipment at December 31, 2019 and 2018 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)
December 31,
2019
2018
—
40
5 — 10
3 — 7
3 — 7
$
$
(In thousands)
4,363 $
74,840
21,358
16,686
29,230
146,477
(65,372)
81,105 $
5,028
67,856
18,274
17,137
24,855
133,150
(64,258)
68,892
Premises and equipment recorded from the Scotiabank PR & USVI Acquisition amounted to $13.0 million.
Depreciation and amortization of premises and equipment totaled $8.5 million in 2019, $8.9 million in 2018 and $9.0 million in 2017.
These are included in the consolidated statements of operations as part of occupancy and equipment expenses.
NOTE 11 - SERVICING ASSETS
Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an
164
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is
recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans
and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to
adequately compensate Oriental for its expected cost. On December 31, 2019 Oriental completed the Scotiabank PR & USVI
Acquisition, increasing servicing assets by $40.1 million.
All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value
measurement method, Oriental measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing
assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the
consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated
and actual prepayment speeds and default rates and losses.
The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs,
and other economic factors, which are determined based on current market conditions.
At December 31, 2019, the servicing asset amounted to $50.8 million ($10.7 million — December 31, 2018) related to mortgage
servicing rights.
The following table presents the changes in servicing rights measured using the fair value method for years ended December 31, 2019,
2018, and 2017:
Fair value at beginning of year
Servicing from mortgage securitizations or asset transfers
Servicing from portfolio acquired
Changes due to payments on loans
Changes in fair value due to changes in valuation model inputs or assumptions
2018
2017
Year Ended December 31,
2019
(In thousands)
$ 10,716 $ 9,821 $ 9,858
1,174
40,463 - -
(906)
1,481
1,658
(814)
(590)
Fair value at end of year
(668)
228
(1,105)
$ 50,779
$ 10,716
$ 9,821
The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for
the years ended 2019, 2018 and 2017:
Year Ended December 31,
Constant prepayment rate
Discount rate
2019
2018
4.47% - 18.81% 4.30% - 9.02% 3.94% - 8.49%
10.00% -
12.00%
10.00% -
12.00%
10.00% - 15.00%
2017
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:
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
165
December 31, 2019
(In thousands)
$
$
$
50,779
(1,085)
(2,131)
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Decrease in fair value due to 10% adverse change
Decrease in fair value due to 20% adverse change
$
$
(2,079)
(4,012)
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10
percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption.
Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower
prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial
service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the
mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting
changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of
expected cash flows.
Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned.
Servicing fees on mortgage loans for the years ended 2019, 2018 and 2017 totaled $4.2 million, $4.1 million and $3.9 million,
respectively.
NOTE 12 — DERIVATIVES
The following table presents Oriental’s derivative assets and liabilities at December 31, 2019 and 2018:
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,
2019
2018
(In thousands)
$
$
$
$
- $
-
6
6 $
907 $
-
6
913 $
14
126
207
347
-
126
207
333
Oriental enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale
borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix Oriental’s interest
payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated
rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions and are properly
documented as such; therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the
cash flow hedges is recognized in other comprehensive income (loss) and is subsequently reclassified into operations in the period
during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in
accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships.
Currently, Oriental does not expect to reclassify any amount included in other comprehensive income (loss) related to these interest
rate swaps to operations in the next twelve months.
The following table shows a summary of these swaps and their terms at December 31, 2019:
166
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Type
Interest Rate Swaps $
$
Notional
Amount
(In thousands)
31,955
31,955
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 loss of $907 thousand and a gain of $14 thousand were recognized in accumulated other comprehensive
income related to the valuation of these swaps at December 31, 2019 and 2018, respectively, and the related asset or liability is being
reflected in the consolidated statements of financial condition.
At December 31, 2018, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of
$126 thousand and were included as part of derivative assets in the consolidated statements of financial position. The credit risk to
these clients stemming from these derivatives, if any, is not material. At December 31, 2018, interest rate swaps not designated as
hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $126 thousand and were
included as part of derivative liabilities in the consolidated statements of financial condition. No interest rate swaps were offered to
clients at December 31, 2019.
Interest Rate Caps
Oriental has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial
results against increases in interest rates. In these cases, Oriental simultaneously enters into mirror-image interest rate cap transactions
with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market
through earnings. As of December 31, 2019 and 2018, the outstanding total notional amount of interest rate caps was $41.5 million
and $150.9 million, respectively. At December 31, 2019 and 2018, the interest rate caps sold to clients represented a liability of $6
thousand and $207 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial
condition. At December 31, 2019 and 2018, the interest rate caps purchased as mirror-images represented an asset of $6 thousand and
$207 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.
NOTE 13 — CORE DEPOSIT, CUSTOMER RELATIONSHIP AND OTHER INTANGIBLES
Core deposit, customer relationship and other intangibles at December 31, 2019 and 2018 consists of the following:
Core deposit
Customer relationship intangibles
Other intangibles
December 31,
2019
2018
(In thousands)
43,185 $
13,213
567
56,965 $
2,481
888
-
3,369
$
$
In connection with the FDIC-assisted acquisition, the BBVAPR Acquisition and the Scotiabank PR & USVI Acquisition, Oriental
recorded a core deposit intangible representing the value of checking and savings deposits acquired. At December 31, 2019 this core
deposit intangible amounted to $43.2 million, including $41.5 from the Scotiabank PR & USVI Acquisition. At December 31, 2018
this core deposit intangible amounted to $2.5 million. In addition, Oriental recorded a customer relationship intangible representing
the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR
and insurance agency in the Scotiabank PR & USVI Acquisitions. At December 31, 2019 this customer relationship intangible
amounted to $13.2 million, from which $12.7 million corresponded to the Scotiabank PR & USVI Acquisition. At December 31, 2018
this customer relationship intangible amounted to $888 thousand. Oriental also recorded other intangibles from the Scotiabank PR &
USVI Acquisition which amounted to $567 thousand at December 31, 2019.
NOTE 14 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at December 31, 2019 and 2018 consists of the following:
167
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans, excluding acquired loans
Investments
Other assets at December 31, 2019 and 2018 consist of the following:
Prepaid expenses
Other repossessed assets
Tax credits
Investment in Statutory Trust
Accounts receivable and other assets
December 31,
2019
2018
(In thousands)
32,728 $
4,053
36,781 $
30,409
3,845
34,254
December 31,
2019
2018
(In thousands)
52,558 $
3,327
277
1,083
78,594
135,839 $
9,788
2,986
2,277
1,083
37,842
53,976
$
$
$
$
Prepaid expenses amounting to $52.6 million at December 31, 2019, include prepaid municipal, property and income taxes
aggregating to $45.3 million from which $31.9 million correspond to the Scotiabank PR & USVI Acquisition. At December 31, 2018
prepaid expenses amounted to $9.8 million, including prepaid municipal, property and income taxes aggregating to $5.5 million.
Other repossessed assets totaled $3.3 million and $3.0 million at December 31, 2019 and 2018, respectively, that consist mainly of
repossessed automobiles, which are recorded at their net realizable value.
At December 31, 2019 and 2018, tax credits for Oriental totaled $277 thousand and $2.3 million, respectively. These tax credits do not
have an expiration date.
NOTE 15— DEPOSITS AND RELATED INTEREST
Total deposits, including related accrued interest payable, as of December 31, 2019 and 2018 consist of the following:
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
168
December 31,
2019
2018
(In thousands)
$
1,675,315 $
3,718,846
1,781,237
279,714
7,455,112
243,498
$
7,698,610
$
1,105,324
2,274,423
805,712
197,559
4,383,018
525,097
4,908,115
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition adding $3.0 billion in core deposits.
Brokered deposits include $222.1 million in certificates of deposits and $21.4 million in money market accounts at December 31,
2019, and $500.8 million in certificates of deposits and $24.3 million in money market accounts at December 31, 2018. As part of the
sale $672.2 million available-for-sale mortgage-backed securities during the year ended December 31, 2019, Oriental reduced $277.7
million brokered deposits.
The weighted average interest rate of Oriental’s deposits was 0.86% and 0.67%, respectively, at December 31, 2019 and 2018. Interest
expense for the years ended December 31, 2019, 2018 and 2017 was as follows:
Demand and savings deposits
Certificates of deposit
2019
Year Ended December 31,
2018
(In thousands)
2017
$
$
14,925 $
24,430
39,355 $
12,478 $
20,475
32,953 $
11,426
18,872
30,298
At December 31, 2019 and 2018, time deposits in denominations of $250 thousand or higher, excluding accrued interest and
unamortized discounts, amounted to $692.1 million and $346.0 million, respectively. Such amounts include public funds time deposits
from various Puerto Rico government municipalities, agencies and corporations of $257.2 million and $19.6 million at a weighted
average rate of 67.0% and 116.4% at December 31, 2019 and 2018, respectively.
At December 31, 2019 and 2018, total public fund deposits from various Puerto Rico government municipalities, agencies and
corporations amounted to $278.7 million and $207.4 million, respectively. These public funds were collateralized with commercial
loans and securities amounting to $320.8 million and $281.2 million at December 31, 2019 and 2018, respectively.
Excluding accrued interest of approximately $11.7 million, the scheduled maturities of certificates of deposit at December 31, 2019
and 2018 are as follows:
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,
2019
2018
(In thousands)
$
$
314,796 $
881,183
1,195,979
732,421
175,032
89,148
78,706
2,271,286 $
305,088
545,363
850,451
484,197
89,340
34,018
42,998
1,501,004
The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $1.0 million and $1.1
million as of December 31, 2019 and 2018, respectively.
169
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 16— BORROWINGS AND RELATED INTEREST
Securities Sold under Agreements to Repurchase
At December 31, 2019, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties
with whom the repurchase agreements were transacted. The counterparties have agreed to resell to Oriental the same or similar
securities at the maturity of these agreements. The purpose of these transactions is to provide financing for Oriental’s securities
portfolio.
The following table shows Oriental’s repurchase agreements, excluding accrued interest in the amount of $274 thousand and $785
thousand at December 31, 2019 and 2018, respectively:
December 31,
2019
2018
(In thousands)
Short-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.70% (December 31,
2018; 2.45% to 2.95%)
Long-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.86% (December 31,
2018; 1.72% to 2.86%)
Total assets sold under agreements to repurchase
$
140,000 $
214,723
50,000
240,000
$
190,000 $
454,723
Repurchase agreements mature as follows:
December 31,
2019
2018
(In thousands)
Less than 90 days
Over 90-days
Total
During the year ended December 31, 2019, Oriental terminated before maturity $191.2 million securities sold under agreements to
repurchase as a result of the sale of available-for-sale securities, at a cost of $7 thousand, included in the statement of operations of the
financial statements. Also, $73.7 million of repurchase agreements matured and were not renewed.
140,000 $
50,000
190,000 $
214,723
240,000
454,723
$
$
The following securities were sold under agreements to repurchase:
170
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Underlying Securities
FNMA and FHLMC Certificates
Total
Underlying Securities
FNMA and FHLMC Certificates
Total
December 31, 2019
Amortized
Cost of
Underlying
Securities
Approximate Weighted
Average
Fair Value
of Underlying
Interest Rate
of Security
Securities
Balance of
Borrowing
(Dollars in thousands)
$
$
204,225 $
204,225 $
190,000 $
190,000 $
204,068
204,068
2.98%
2.98%
December 31, 2018
Amortized
Cost of
Underlying
Securities
Approximate Weighted
Average
Fair Value
of Underlying
Interest Rate
of Security
Securities
Balance of
Borrowing
(Dollars in thousands)
$
$
496,814 $
496,814 $
454,723 $
454,723 $
487,181
487,181
3.01%
3.01%
The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2019, 2018 and
2017, excluding accrued interest:
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
Advances from the Federal Home Loan Bank of New York
2019
December 31,
2018
(In thousands)
2017
$
$
299,842 $
461,954 $
2.48%
2.45%
357,086 $
457,053 $
2.17%
2.49%
393,133
606,210
1.80%
1.63%
Advances are received from the FHLB-NY under an agreement whereby Oriental is required to maintain a minimum amount of
qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2019 and 2018, these advances
were secured by mortgage and commercial loans amounting to $1.060 billion and $847.3 million, respectively. Also, at December 31,
2019 and 2018, Oriental had an additional borrowing capacity with the FHLB-NY of $983 million and $762.0 million, respectively.
At December 31, 2019 and 2018, the weighted average remaining maturity of FHLB’s advances was 22.7 months and 26.6 months,
respectively. The original terms of these advances range between one day and seven years, and the FHLB-NY does not have the right
to exercise put options at par on any advances outstanding as of December 31, 2019.
The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $160 thousand and
$176 thousand, at December 31, 2019 and 2018, respectively:
171
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 1.85%
(December 31, 2018 - 2.61%)
Long-term fixed-rate advances from FHLB, with a weighted average interest rate of 2.97%
(December 31, 2018 - 2.89%)
Advances from FHLB mature as follows:
Under 90 days
Over one to three years
Over three to five years
Over five years
December 31,
2019
2018
(In thousands)
$
31,955 $
33,572
$
45,894
77,849 $
43,872
77,444
December 31,
2019
2018
(In thousands)
31,955 $
8,517
33,018
4,359
77,849 $
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, 2019 and 2018, respectively.
In August 2003, the Statutory Trust II, a special purpose entity of the Company, was formed for the purpose of issuing trust
redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the
Statutory Trust II as part of a pooled underwriting transaction.
The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated
deferrable interest debenture issued by Oriental. The subordinated deferrable interest debenture has a par value of $36.1 million, bears
interest based on 3-month LIBOR plus 295 basis points (4.85% at December 31, 2019; 5.74.% at 2018), is payable quarterly, and
matures on September 17, 2033. It may be called at par after five years and quarterly thereafter (next call date March 2020). The trust
redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest debenture. The
subordinated deferrable interest debenture issued by Oriental is accounted for as a liability denominated as a subordinated capital note
on the consolidated statements of financial condition.
The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the Basel III capital
rules issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their
Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such
instruments issued before May 19, 2010 by a bank holding company, such as Oriental, with total consolidated assets of less than $15
billion as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, Oriental is permitted to continue to include
its existing trust preferred securities as Tier 1 capital.
172
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 17 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
Oriental’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition,
Oriental’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off
with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party
has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in
respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting
agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party
custodian pursuant to an account control agreement.
The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities
at December 31, 2019 and 2018:
December 31, 2019
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross
Amounts
Net Amount of
Offset in the
Gross Amount Statement of
of Recognized
Assets
Financial
Condition
Assets
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Derivatives
$
6
$
-
$
6
$
-
$
-
$
6
(In thousands)
December 31, 2018
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross
Amounts
Net amount of
Offset in the
Gross Amount Statement of
of Recognized
Assets
Financial
Condition
Assets
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Derivatives
$
347
$
-
$
347
$
2,037
$
-
$
(1,690)
(In thousands)
173
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2019
Gross Amounts Not Offset in the
Statement of Financial Condition
Net Amount of
Gross
Amounts
Offset in the
Gross Amount Statement of
of Recognized
Liabilities
Financial
Condition
Liabilities
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Provided
Net
Amount
(In thousands)
Derivatives
Securities sold under
agreements to repurchase
$
913
$
-
$
913
$
-
$
-
$
913
190,000
-
190,000
204,068
-
(14,068)
Total
$
190,913
$
-
$
190,913
$
204,068
$
-
$
(13,155)
December 31, 2018
Gross Amounts Not Offset in the
Statement of Financial Condition
Net Amount of
Gross
Amounts
Offset in the
Gross Amount Statement of
of Recognized
Liabilities
Financial
Condition
Liabilities
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Provided
Net
Amount
(In thousands)
Derivatives
Securities sold under
agreements to repurchase
$
333
$
-
$
333
$
-
1,980
$
(1,647)
454,723
-
454,723
487,181
-
(32,458)
Total
$
455,056
$
-
$
455,056
$
487,181
$
1,980
$
(34,105)
174
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 18 — EMPLOYEE BENEFIT PLAN
Oriental has a profit sharing plan containing a cash or deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d) of the
Puerto Rico Internal Revenue Code of 2011, as amended, (the "PR Code"), and Sections 401(a) and 401(k) of the United States
Internal Revenue Code of 1986, as amended. This plan is subject to the provisions of Title I of the Employee Retirement Income
Security Act of 1976, as amended (“ERISA”). This plan covers all full-time employees of Oriental who are age 21 or older. Under this
plan, participants may contribute each year up to $19,000. Oriental's matching contribution is 50 cents for each dollar contributed by
an employee, up to 4% of such employee’s base salary. It is invested in accordance with the employee’s decision among the available
investment alternatives provided by the plan. This plan is entitled to acquire and hold qualified employer securities as part of its
investment of the trust assets pursuant to ERISA Section 407. Oriental contributed $923 thousand, $856 thousand and $836 thousand
in cash during 2019, 2018 and 2017, respectively. Oriental’s contribution becomes 100% vested once the employee completes three
years of service.
Also, Oriental offers to its senior management a non-qualified deferred compensation plan, where executives can defer taxable
income. Both the employer and the employee have flexibility because non-qualified plans are not subject to ERISA contribution limits
nor are they subject to discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current
taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without
current income tax to the individual. Income taxes are due when the funds are withdrawn.
The Retirement Plan for Scotiabank de Puerto Rico employees (1081.01(a)) was part of the acquisition. The Plan is a “tax-qualified”
“profit-sharing plan”, as defined in section 401(a) of the Internal Revenue Code of 1986, as amended (the “U.S. Code”) and section
1081.01(a) of the Internal Revenue Code for a New Puerto Rico (the “P.R. Code”), with a “qualified cash-or-deferred arrangement,”
as defined in section 401(k) of the U.S. Code and section 1081.01(d) of the P.R Code. The employee can participate up to 75% of
salary before taxes with a matching of 100% of the first 3% deferred and 50% of the next 3% up to 6% of salary; with a maximum
annual contribution of $19,000 in 2019. They receive a non-elective contribution of 2% up to a maximum of $2,000 in the year.
NOTE 19 — RELATED PARTY TRANSACTIONS
Oriental grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of
business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the
years December 31, 2019, 2018, and 2017 was as follows:
Balance at the beginning of year
New loans and disbursements
Repayments
Balance at the end of year
Year Ended December 31,
2018
2019
2017
(In thousands)
28,520 $
203
(6,411)
22,312 $
28,138 $
10,388
(10,006)
28,520 $
$
$
29,020
2,875
(3,757)
28,138
Oriental also hires professional services amounting to $3.7 million from a related party.
175
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 20 — INCOME TAXES
Oriental is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code, as amended (the “Puerto Rico Code”). For
2019, the Puerto Rico Code imposed a maximum statutory corporate tax rate of 37.5%. Oriental has operations in U.S. through its
wholly owned subsidiary OPC, a retirement plan administration based in Florida. Also, in October 2017, Oriental expanded its
operations in U.S. through the Bank's wholly owned subsidiary OFG USA. Both subsidiaries are subject to state and federal taxes.
OPC is subject to Florida state taxes and OFG USA is subject to North Carolina state taxes. OFG USA elected to be classified as a
corporation.
Under the Puerto Rico Code, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns.
OFG Bancorp and its subsidiaries are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income
earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any
one year may be used to offset regular income tax in future years, subject to certain limitations.
The components of income tax expense for the years ended December 31, 2019, 2018, and 2017 are as follows:
Current income tax expense
Deferred income tax (benefit) expense
Total income tax expense (benefit)
Year Ended December 31,
2018
2019
2017
(In thousands)
25,477 $
(4,068)
21,409 $
33,618 $
14,772
48,390 $
$
$
19,101
(3,658)
15,443
In relation to the exempt income level, the Bank’s investment securities portfolio and loans portfolio generated net tax-exempt interest
income of $11.8 million at 2019, $11.0 million at 2018 and $10.0 million at 2017. OIB generated exempt income of $10.3 million,
$5.3 million and $9.6 million for 2019, 2018, and 2017, respectively.
Oriental maintained an effective tax rate lower than statutory rate for the year ended December 31, 2019, mainly by investing in tax-
exempt obligations, doing business through its international banking entity Oriental International Bank and by expanding its
subsidiary operations in the U.S., which are taxed at a lower rate.
Oriental’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes
as follow:
2019
Amount
Rate
Year Ended December 31,
2018
Rate
Amount
(Dollars in thousands)
2017
Amount
Rate
$
28,219
37.50%
$
51,792
39.00%
$
26,555
39.00%
(8,728)
-11.60%
(6,645)
-5.01%
(9,506)
-13.96%
384
1,217
1,794
(265)
-
(118)
(1,094)
0.51%
1.62%
2.38%
-0.35%
0.00%
-0.16%
-1.44%
269
1,504
(386)
(20)
4,069
-
(2,193)
0.20%
1.13%
-0.29%
-0.02%
3.06%
0.00%
-1.63%
281
(305)
(775)
(279)
-
-
(528)
0.41%
-0.45%
-1.14%
-0.41%
0.00%
0.00%
-0.79%
Income tax expense at statutory
rates
Tax effect of exempt and
excluded income, net
Disallowed net operating loss
carryover
Change in valuation allowance
Unrecognized tax benefits, net
Capital gain at preferential rate
Effect of change in tax rate
Bargain purchase gain
Other items, net
Income tax expense
$
21,409
28.46% $
48,390
36.44% $
15,443
22.66%
176
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental’s effective tax rate for the year ended December 31, 2019 was 28.46%, and it was mainly affected by changes to the
proportion of exempt income to total income. For the years ended December 31, 2018 and 2017, the effective tax rate was 36.44% and
22.7%, respectively. On December 10, 2018, the Puerto Rico government enacted Act 257-2018 introducing several amendments to
the Puerto Rico Code. Some of the most relevant income tax changes include: a reduction of the maximum corporate income tax rate
to 37.5%, from 39%, and a restriction of the use of partnership gains to offset current and accumulated operating losses generated by a
corporate partner.
Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax
rate if realized. At December 31, 2019, the amount of unrecognized tax benefits was $2.7 million (December 31, 2018 - $875
thousand). Oriental had accrued $51 thousand at December 31, 2019 (December 31, 2018 - $81 thousand) for the payment of interest
and penalties relating to unrecognized tax benefits and released $439 thousand due to expiration of statute of limitation.
The following table presents a reconciliation of unrecognized tax benefits:
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
Balance at end of year
2019
Year Ended December 31,
2018
In thousands)
2017
$
$
875 $
51
2,181
(439)
2,668 $
1,260 $
81
-
(466)
875 $
2,040
97
-
(877)
1,260
Oriental follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The amount of unrecognized tax
benefits may increase or decrease in the future due to new or current tax year positions, expiration of open income tax returns, changes
in management’s judgment about the level of uncertainty, status of examinations, litigations and legislative activity. For the year 2019
there was a net increase in unrecognized tax benefit of $1.8 million.
The statute of limitations under the Puerto Rico Code is four years and the statute of limitations for federal tax purposes is three years,
after a tax return is due or filed, whichever is later. Oriental is potentially subject to income tax audits in the Commonwealth of Puerto
Rico for taxable years 2015 to 2018, until the applicable statute of limitations expires. In addition, Oriental’s US subsidiaries are
potentially subject to income tax audits by the IRS for taxable years 2016 to 2018. Tax audits by their nature are often complex and
can require several years to complete.
The determination of the deferred tax expense or benefit is generally based on changes in the carrying amounts of assets and liabilities
that generate temporary differences. The carrying value of Oriental’s net deferred tax assets assumes that Oriental will be able to
generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the
future, Oriental may be required to record valuation allowances against its deferred tax assets resulting in additional income tax
expense in the consolidated statements of operations. Significant components of Oriental’s deferred tax assets and liabilities as of
December 31, 2019, and 2018 were as follows:
Deferred tax asset:
Allowance for loan and lease losses and other reserves
Scotiabank PR discount
Loans and other real estate valuation adjustment
Deferred loan charge-offs
177
December 31,
2019
2018
(In thousands)
$
60,248
$
15,499 $
6,874
144,799
85,227
-
7,842
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net operating loss carry forwards
Alternative minimum tax
Unrealized net loss included in other comprehensive income
Deferred loan origination income, net
Goodwill
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:
Acquired loans tax basis
FDIC-assisted Eurobank acquisition, net
Customer deposit and customer relationship intangibles
Building valuation adjustment
Unrealized net gain on available-for-sale securities
Servicing asset
Other deferred tax liabilities
Total gross deferred tax liabilities
Net deferred tax asset
7,785
25,123
340
11,303
30,408
51,079
457
23,506
377,421
(6,585)
370,836
(130,997)
(14,004)
(17,838)
(7,848)
(82)
(15,988)
(7,339)
(194,096)
176,740 $
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)
113,763
$
As of December 31, 2019 and 2018, Oriental's net deferred tax asset, net of a valuation allowance of $6.6 million and $4.6 million,
respectively, amounted to $176.7 million and $113.8 million, respectively. The deferred tax assets as of December 31, 2019 include
acquisition related deferred tax assets of $59.9 million. The acquisition of SBPR is a nontaxable transaction where the historical tax
bases of the acquired business carries over to the acquirer, the historical tax bases include a tax-deductible goodwill from prior
acquisitions of SBPR with a deferred tax asset of $30.4 million. The increase in valuation allowance of $2.0 million was mainly
related to the realizability of the Holding company’s deferred tax assets ($1.2 million) and the remaining $737 thousand was related to
the SBPR acquisition deferred tax asset. In assessing the realizability of the deferred tax asset, management considers whether it is
more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax
asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in
making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax asset are deductible, management believes it is more
likely than not that Oriental will realize the benefits of these deductible differences, net of the existing valuation allowances, at
December 31, 2019. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carry-forward period are reduced.
NOTE 21 — REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital Requirements
OFG Bancorp (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal
and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Oriental’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Oriental and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
178
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules based on the framework of the Basel Committee on
Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”),
which became effective January 1, 2015 for Oriental and the Bank (subject to certain phase-in periods through January 1, 2019) and
that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other
matters, the Basel III capital rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1
capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and
adjustments to capital as compared to prior regulations. The Basel III capital rules prescribe a new standardized approach for risk
weightings that expand the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to
a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a
variety of asset classes.
Pursuant to the Basel III capital rules, the minimum capital ratios requirements are as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known
as the “leverage ratio”).
As of December 31, 2019 and 2018, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As
of December 31, 2019 and 2018, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be
categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier
1 leverage ratios as set forth in the tables presented below.
OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of December 31, 2019 and 2018 are as follows:
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, 2019
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, 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
$
$
$
$
$
$
$
$
938,994
13.76% $
545,953
8.00% $
682,441
10.00%
852,311
12.49% $
409,465
6.00% $
545,953
8.00%
735,441
10.78% $
307,099
4.50% $
443,587
6.50%
852,311
9.24% $
369,151
4.00% $
461,438
5.00%
990,499
20.48% $
386,977
8.00% $
483,721
10.00%
928,577
19.20% $
290,233
6.00% $
386,977
8.00%
811,707
16.78% $
217,675
4.50% $
314,419
6.50%
928,577
14.22% $
261,125
4.00% $
326,406
5.00%
179
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Actual
Amount
Ratio
Minimum Capital
Requirement
Ratio
Amount
(Dollars in thousands)
Minimum to be Well
Capitalized
Amount
Ratio
Bank Ratios
As of December 31, 2019
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, 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
$
$
$
$
$
$
$
$
899,844
13.21% $
544,964
8.00% $
681,205
10.00%
813,444
11.94% $
408,723
6.00% $
544,964
8.00%
813,444
11.94% $
306,542
4.50% $
442,783
6.50%
813,444
8.85% $
367,537
4.00% $
459,421
5.00%
949,596
19.68% $
385,992
8.00% $
482,490
10.00%
887,918
18.40% $
289,494
6.00% $
385,992
8.00%
887,918
18.40% $
217,120
4.50% $
313,618
6.50%
887,918
13.68% $
259,547
4.00% $
324,434
5.00%
180
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 22 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, and dividend equivalents, as well as equity-based performance awards.
The activity in outstanding options for the years ended December 31, 2019, 2018, and 2017 is set forth below:
Year Ended December 31,
2019
2018
2017
Number
Of
Options
Weighted
Average
Exercise
Price
Number
Of
Options
Weighted
Average
Exercise
Price
Number
Of
Options
Weighted
Average
Exercise
Price
739,326 $
-
(105,032)
-
634,294 $
14.28
-
12.32
-
14.60
845,619 $
-
(101,268)
(5,025)
739,326 $
14.14
-
13.41
17.08
14.28
917,269 $
-
(71,150)
(500)
845,619 $
14.08
-
12.96
15.23
14.14
Beginning of year
Options granted
Options exercised
Options forfeited
End of year
The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options
outstanding at December 31, 2019:
Outstanding
Exercisable
Weighted
Average
Weighted
Contract Life
Number of
Average
Remaining
Number of
Weighted
Average
Range of Exercise Prices
Options
Exercise Price
(Years)
Options
Exercise Price
$5.63 to $8.45
11.27 to 14.08
14.09 to 16.90
16.91 to 19.71
-
233,994
244,625
155,675
634,294 $
-
11.88
15.39
17.00
14.60
-
1.5
3.7
5.2
3.9
3,532
313,394
228,625
78,362
623,913 $
8.28
11.81
15.29
17.44
13.77
Aggregate Intrinsic Value
$
5,714,603
$
1,754,258
There were no options granted during 2019, 2018 and 2017. The average fair value of each option granted would have been estimated
at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use
in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market.
Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in Oriental’s stock options. Use of
an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including
the expected stock price volatility and average life of each option grant.
The following table summarizes the activity in restricted units under the Omnibus Plan for the years ended December 31, 2019, 2018
and 2017:
181
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2019
Weighted
Average
Year Ended December 31,
2018
Weighted
Average
2017
Weighted
Average
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
254,050 $
125,100
-
-
379,150 $
12.50
21.36
-
-
15.32
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
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, 2019 was
$2.8 million and is expected to be recognized over a weighted-average period of 1.8 years.
NOTE 23 – STOCKHOLDERS’ EQUITY
Preferred Stock and Common Stock
On October 22, 2018, Oriental completed the conversion of all of its 84,000 shares of Series C preferred stock into common stock.
Each share of Series C preferred stock was converted into 86.4225 shares of common stock. Upon conversion, the Series C preferred
stock is no longer outstanding and all rights with respect to the Series C preferred stock have ceased and terminated, except the right to
receive the number of whole shares of common stock issuable upon conversion of the Series C preferred stock and any required cash-
in-lieu of fractional shares. At both December 31, 2019 and 2018, preferred and common stock paid-in capital amounted $92.0 million
and $59.9 million, respectively.
Additional Paid-in Capital
Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of
issuance. As of both December 31, 2019 and 2018, accumulated issuance costs charged against additional paid-in capital amounted to
$13.6 million and $10.1 million for common and preferred stock, respectively.
Legal Surplus
The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund
until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2019 and 2018, the
Bank’s legal surplus amounted to $95.8 million and $90.2 million, respectively. The amount transferred to the legal surplus account is
not available for the payment of dividends to shareholders.
Treasury Stock
Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $7.7 million of its
outstanding shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. During
the years ended December 31, 2019, 2018 and 2017, Oriental did not repurchase any shares under the program.
At December 31, 2019 the number of shares that may yet be purchased under the $70 million program is estimated at 327,440, and
was calculated by dividing the remaining balance of $7.7 million by $23.61 (closing price of Oriental's common stock at December
31, 2019).
The activity in connection with common shares held in treasury by Oriental for the years ended December 31, 2019, 2018 and 2017 is
set forth below:
182
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2019
Shares
Dollar
Amount
Year Ended December 31,
2018
Shares
Dollar
Amount
(In thousands, except shares data)
2017
Shares
Dollar
Amount
$
8,591,310
$
103,633
8,678,427
$
104,502
8,711,025
$
104,860
(105,032)
(1,294)
(87,117)
(869)
(32,598)
(358)
Beginning of year
Common shares used upon
lapse of restricted stock units
and options
End of year
$
8,486,278
$
102,339
8,591,310
$
103,633
8,678,427
$
104,502
NOTE 24 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of income taxes, as of December 31, 2019 and 2018 consisted of:
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 (loss) gain on cash flow hedges
Income tax effect of unrealized (loss) gain on cash flow hedges
Net unrealized (loss) gain on cash flow hedges
December 31,
2019
2018
(In thousands)
$
$
(306)
(135)
(12,654)
1,682
(441)
(907)
340
(567)
(10,972)
14
(5)
9
Accumulated other comprehensive (loss), net of income taxes
$
(1,008)
$
(10,963)
Unrealized losses on available-for-sale securities includes $12.0 million, net of tax effect of the adoption of ASU No. 2017-12 from
reclassification of all of its mortgage backed securities with carrying value of $424.7 million, from the held-to-maturity portfolio into
the available-for-sale portfolio.
The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the years ended
December 31, 2019, 2018 and 2017:
183
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31,
2019
Net unrealized Net unrealized Accumulated
loss on
cash flow
other
comprehensive
gains on
securities
available-for-
sale
hedges
(loss) income
(In thousands)
Beginning balance
Transfer of securities held to maturity to available-for-sale
Other comprehensive income (loss) before reclassifications
Amounts reclassified out of accumulated other comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
$
(10,972) $
(12,041)
14,335
8,237
10,531
9 $
-
(2,442)
1,866
(576)
(10,963)
(12,041)
11,893
10,103
9,955
$
(441) $
(567) $
(1,008)
Year Ended December 31,
2018
Net unrealized Net unrealized Accumulated
loss on
cash flow
other
comprehensive
gains on
securities
available-for-
sale
hedges
(loss) income
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
(In thousands)
$
(2,638) $
(311) $
(8,104)
(230)
(8,334)
(1,555)
1,875
320
(2,949)
(9,659)
1,645
(8,014)
$
(10,972) $
9 $
(10,963)
Year Ended December 31,
2017
Net unrealized Net unrealized Accumulated
loss on
cash flow
other
comprehensive
gains on
securities
available-for-
sale
hedges
(loss) income
(In thousands)
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other comprehensive income (loss)
Other comprehensive (loss) income
Ending balance
$
2,209
(11,563)
6,716
(4,847)
(613)
(186)
488
302
$
(2,638) $
(311) $
1,596
(11,749)
7,204
(4,545)
(2,949)
The following table presents reclassifications out of accumulated other comprehensive income for the years ended December 31,
2019, 2018 and 2017:
184
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cash flow hedges:
Interest-rate contracts
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
NOTE 25 – EARNINGS PER COMMON SHARE
Amount reclassified out of accumulated other
comprehensive income
Year Ended December 31,
2019
2018
(In thousands)
2017
Affected Line
Item in
Consolidated
Statement of
Operations
$
1,866 $
1,875 $
Net interest
expense
488
8,274
-
-
5
6,896
104
$
(37)
10,103 $
(235)
1,645 $
(284)
7,204
Net gain on sale
of securities
Income tax
expense
Income tax
expense
The calculation of earnings per common share for the years ended December 31, 2019, 2018 and 2017 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
Year Ended December 31,
2019
2017
2018
(In thousands, except per share data)
$
53,841
$
84,410
$
52,646
(6,512)
-
47,329
-
47,329
$
$
(6,511)
(5,513)
$
72,386
5,513
77,899
$
(6,512)
(7,350)
38,784
7,350
46,134
$
$
51,335
45,400
43,939
384
-
51,719
142
5,807
51,349
19
7,138
51,096
0.88
0.88
Earnings per common share - basic
Earnings per common share - diluted
$
$
0.92
$
0.92
$
1.59
$
1.52
$
During the last quarter of 2018, Oriental converted all of its 84,000 outstanding shares of Series C Preferred Stock into common stock.
Each Series C Preferred Stock share was converted into 86.4225 shares of common stock. In computing diluted earnings per common
share during the first nine months of 2018, the 84,000 shares of Series C Preferred Stock that remained outstanding, with a conversion
rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as average potential common shares
from the date they were issued and outstanding. Moreover, in computing diluted earnings per common share, the dividends declared
during the years ended December 31, 2018 and 2017 on the convertible preferred stock were added back as income available to
common shareholders.
185
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the years ended December 31, 2019, 2018 and 2017, weighted-average stock options with an anti-dilutive effect on earnings per
share not included in the calculation amounted to 2,575, 432,532 and 932,306, respectively.
NOTE 26 – GUARANTEES
At December 31, 2019 and 2018, the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters
of credit represented a liability of $47.3 million and $23.9 million, respectively.
Oriental has a liability for residential mortgage loans sold subject to credit recourse pursuant to FNMA’s residential mortgage loan
sales and securitization programs. At December 31, 2019 and 2018, the unpaid principal balance of residential mortgage loans sold
subject to credit recourse was $147.4 million and $5.4 million, respectively, $142.5 million related to the Scotiabank PR & USVI
Acquisition.
The following table shows the changes in Oriental’s liability for estimated losses from these credit recourse agreements, included in
the consolidated statements of financial condition during the years ended December 31, 2019, 2018 and 2017.
Balance at beginning of year
Additions from Scotiabank PR & USVI Acquisition
Net (charge-offs/terminations) recoveries
Balance at end of year
Year Ended December 31,
2019
2018
(In thousands)
2017
$
$
346 $
710
(71)
985 $
358
$
-
(12)
346
$
710
-
(352)
358
The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was
assumed and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan,
considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing
would become 120 days delinquent, in which case Oriental is obligated to repurchase the loan.
If a borrower defaults, pursuant to the credit recourse provided, Oriental is required to repurchase the loan or reimburse the third-party
investor for the incurred loss. The maximum potential amount of future payments that Oriental would be required to make under the
recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and
interest, if applicable. During 2019, Oriental did not repurchase any mortgage loans subject to the credit recourse provision. During
2018, Oriental repurchased approximately $705 thousand of unpaid principal balance in mortgage loans subject to the credit recourse
provisions. During 2017, Oriental repurchased approximately $107 thousand of unpaid principal balance in mortgage loans subject to
the credit recourse provisions. If a borrower defaults, Oriental has rights to the underlying collateral securing the mortgage loan.
Oriental suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the
outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related
property. At December 31, 2019, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to
$985 thousand (December 31, 2018– $346 thousand).
When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the
characteristics of the loans sold. Oriental's mortgage operations division groups conforming mortgage loans into pools which are
exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to
FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are
performed by Oriental to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified
characteristics, Oriental may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the
loans. During the years ended December 31, 2019, Oriental repurchased $12 million (December 31, 2018 – $7.7 million) of unpaid
principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. At December 31,
2019, Oriental had $4.6 million liability for the estimated credit losses related to these loans.
186
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the years ended December 31, 2019, 2018, 2017, Oriental recognized $17 thousand, $556 thousand and $260 thousand,
respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $123 thousand, $160
thousand and $477 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of
customary representations and warranties.
Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or
serviced to certain other investors, including the FHLMC, require Oriental to advance funds to make scheduled payments of principal,
interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2019, Oriental serviced
$4.4 billion (December 31, 2018 - $895.6 million) in mortgage loans for third parties. Oriental generally recovers funds advanced
pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the
case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, Oriental
must absorb the cost of the funds it advances during the time the advance is outstanding. Oriental must also bear the costs of
attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would
be canceled as part of the foreclosure proceedings and Oriental would not receive any future servicing income with respect to that
loan. At December 31, 2019, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements
was approximately $3.6 million (December 31, 2018 - $706 thousand). To the extent the mortgage loans underlying Oriental's
servicing portfolio experience increased delinquencies, Oriental would be required to dedicate additional cash resources to comply
with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
NOTE 27— COMMITMENTS AND CONTINGENCIES
Loan Commitments
In the normal course of business, Oriental becomes a party to credit-related financial instruments with off-balance-sheet risk to meet
the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial
letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those
instruments reflects the extent of Oriental’s involvement in particular types of financial instruments.
Oriental’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to
extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the
contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In
addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting
transactions are identified. Oriental uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
Credit-related financial instruments at December 31, 2019 and 2018 were as follows:
Commitments to extend credit
Commercial letters of credit
December 31,
2019
2018
(In thousands)
$
853,148 $
2,178
541,423
340
Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Oriental evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by Oriental upon the extension of credit, is based on management’s credit evaluation of the counterparty.
At December 31, 2019 and 2018, commitments to extend credit consisted mainly of undisbursed available amounts on commercial
lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to
expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash
requirements. These lines of credit had a reserve of $2.7 million and $627 thousand, at December 31, 2019 and 2018, respectively.
187
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term
international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended.
However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.
The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to
guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at
December 31, 2019 and 2018, is as follows:
Standby letters of credit and financial guarantees
Loans sold with recourse
December 31,
2019
2018
$
(In thousands)
47,251 $
147,399
23,889
5,414
Standby letters of credit and financial guarantees are written conditional commitments issued by Oriental to guarantee the payment
and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary
may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of
credit in the event of non-performance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily
issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
The amount of collateral obtained, if it is deemed necessary by Oriental upon extension of credit, is based on management’s credit
evaluation of the customer.
Contingencies
Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of
business, Oriental and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of Oriental,
including the Bank (and its subsidiary, OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various
U.S., Puerto Rico and other regulators.
Oriental seeks to resolve all arbitration, litigation and regulatory matters in the manner management believes is in the best interests of
Oriental and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or
scope of any penalties or other relief sought as appropriate in each pending matter.
Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of Oriental’s management,
based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not
be likely to have a material adverse effect on the consolidated statements of financial condition of Oriental. Nonetheless, given the
substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse
outcome in certain of these matters could, from time to time, have a material adverse effect on Oriental’s consolidated results of
operations or cash flows in particular quarterly or annual periods. Oriental has evaluated all arbitration, litigation and regulatory
matters where the likelihood of a potential loss is deemed reasonably possible. Oriental has determined that the estimate of the
reasonably possible loss is not significant.
NOTE 28— OPERATING LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment
for a period of time in exchange for consideration. On January 1, 2019, Oriental adopted ASU No. 2016-02 “Leases” (Topic 842) and
all subsequent ASUs that modified Topic 842. For Oriental, Topic 842 primarily affected the accounting treatment for operating lease
agreements in which Oriental is the lessee. Oriental elected the hindsight practical expedient, which allows entities to use hindsight
when determining lease term and impairment of right-of-use assets. As a result of the changes to the lease terms, Oriental reduced its
retained earnings by $736 thousand on the effective date, January 1, 2019.
Lessee Accounting
188
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Right of use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that
a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation
to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease
payments over the lease term calculated using our incremental borrowing rate. Lease terms include options to extend or terminate the
lease when it is reasonably certain that those options will be exercised. The right-of-use asset is measured at the amount of the lease
liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease
payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining
lease term on a straight-line basis, and any impairment of the right-of-use asset. Variable lease payments are generally expensed as
incurred and include certain nonlease components, such as maintenance and other services provided by the lessor, and other charges
included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these
short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
Oriental’s leases do not contain residual value guarantees or material variable lease payments. All leases were classified as operating
leases.
Substantially all of the leases in which Oriental is the lessee are comprised of real estate property for branches, ATM locations, and
office space with terms extending through 2032. All of our leases are classified as operating leases, and therefore, were previously not
recognized on Oriental’s consolidated statements of financial condition. With the adoption of Topic 842, operating lease agreements
are required to be recognized on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease
liability. Oriental leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.
Operating Lease Cost
Lease costs
Variable lease costs
Short-term lease cost
Lease income
Total lease cost
Year Ended
December 31,
2019
Statement of
Operations
Classification
$
6,571
2,324
180
(554)
8,521
$
Occupancy and
equipment
Occupancy and
equipment
Occupancy and
equipment
Occupancy and
equipment
Rent expense for the years ended December 31, 2018 and 2017, prior to adoption of ASU 2016-02 (Topic 842), was $9.0 million and
$9.9 million, respectively, included in the "occupancy and equipment" caption in the unaudited consolidated statements of operations.
Operating Lease Assets and Liabilities
Right-of-use assets
Lease Liabilities
$
$
39,112
39,840
Operating lease right-of-use assets
Operating leases liabilities
December 31 2019
Statement of Financial Condition Classification
(In thousands)
189
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Weighted-average remaining lease term
Weighted-average discount rate
December 31, 2019
(In thousands)
6.5 years
6.8%
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2019 were as
follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Present value of lease liabilities
Minimum Rent
(In thousands)
10,823
8,544
7,225
6,082
4,077
13,358
50,109
10,269
39,840
$
$
$
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2018 were as
follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
Minimum Rent
(In thousands)
5,618
4,293
3,360
2,494
1,968
6,679
24,412
$
$
190
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 29 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Oriental follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”).
Fair Value Measurement
The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Money market investments
The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial
condition as these are reasonable estimates of fair value given the short-term nature of the instruments.
Investment securities
The fair value of investment securities is based on valuations obtained from an independent pricing provider, ICE Data Pricing
(formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. Such
securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not
available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the
market activity of the instrument, and such securities are classified as Level 3. At December 31, 2019 and 2018, Oriental did not have
investment securities classified as Level 3.
Derivative instruments
The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of
interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on
earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for
rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include
discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account
for the industry sector and the credit rating of the counterparty and/or Oriental. Certain other derivative instruments with limited
market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation
methodology, derivative instruments are classified as Level 2 or Level 3.
Servicing assets
Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash
flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late
charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation
inputs, the servicing rights are classified as Level 3.
Impaired Loans
Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow
calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs
reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price
concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans
measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the
collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in
similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans
considered impaired are classified as Level 3.
191
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
192
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Level 1
December 31, 2019
Fair Value Measurements
Level 3
Level 2
(In thousands)
Total
Recurring fair value measurements:
Investment securities available-for-sale
$
397,183
$
676,986
$
Trading securities
Money market investments
Derivative assets
Servicing assets
Derivative liabilities
Non-recurring fair value measurements:
Impaired commercial loans
Foreclosed real estate
Other repossessed assets
Recurring fair value measurements:
Investment securities available-for-sale
Trading securities
Money market investments
Derivative assets
Servicing assets
Derivative liabilities
Non-recurring fair value measurements:
Impaired commercial loans
Foreclosed real estate
Other repossessed assets
-
6,775
-
-
-
403,958
-
-
-
-
Level 1
10,805
-
4,930
-
-
-
15,735
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
37
-
6
-
(913)
676,116
$
-
-
-
-
50,779
-
50,779
$
1,074,169
37
6,775
6
50,779
(913)
1,130,853
$
-
-
-
-
$
$
61,128
$
29,909
3,327
94,364
$
61,128
29,909
3,327
94,364
December 31, 2018
Fair Value Measurements
Level 3
Level 2
(In thousands)
$
831,052
360
-
347
-
(333)
831,426
$
-
-
-
-
$
$
-
-
-
-
10,716
-
10,716
81,976
33,768
2,986
118,730
$
$
$
$
Total
841,857
360
4,930
347
10,716
(333)
857,877
81,976
33,768
2,986
118,730
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2019, 2018 and 2017:
193
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Level 3 Instruments Only
Balance at beginning of year
New instruments acquired
Principal repayments
Changes in fair value of servicing assets
Balance at end of year
Servicing Assets
(In thousands)
Year Ended December 31,
2018
2017
2019
$
$
10,716 $
41,637
(906)
(668)
50,779 $
9,821 $
1,481
(814)
228
10,716 $
9,858
1,658
(590)
(1,105)
9,821
During the years ended December 31, 2019, 2018, and 2017, there were purchases and sales of assets and liabilities measured at fair
value on a recurring basis. There were no transfers into and out of Level 1 and Level 2 fair value measurements during such periods.
The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring
basis using significant unobservable inputs (Level 3) at December 31, 2019:
December 31, 2019
Valuation
Technique
Unobservable
Input
Range
Fair Value
(In thousands)
Servicing assets
Collateral dependent
impaired loans
$
50,779
Cash flow
valuation
$
33,645
Other non-collateral dependent impaired loans
$
27,483
Foreclosed real estate
$
29,909
Other repossessed assets
$
3,327
Constant
prepayment rate
Discount rate
Appraised value
less disposition
costs
4.47% -18.81%
10.00% - 15.00%
14.20% - 42.20%
Discount rate
4.75% - 10.25%
Fair value of
property
or collateral
Cash flow
valuation
Fair value of
property
or collateral
Appraised value
less disposition
costs
14.20% - 47.20%
Fair value of
property
or collateral
Estimated net
realizable value
less disposition
costs
29.00% - 71.00%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Servicing assets – The significant unobservable inputs used in the fair value measurement of Oriental’s servicing assets are constant
prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of
total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in
the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions
(principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to
collection/realization of expected cash flows.
Fair Value of Financial Instruments
194
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
195
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair value and carrying value of Oriental’s financial instruments at December 31, 2019 and 2018 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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
December 31,
2019
2018
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
(In thousands)
851,307
$
1,450 $
851,307
$
1,450 $
447,033
$
3,030 $
447,033
3,030
37
$
1,074,169 $
37
$
1,074,169 $
-
$
13,048 $
560
$
6 $
-
$
13,048 $
560
$
6 $
360
$
841,857 $
410,353
$
12,644 $
$
3
347 $
913 $
913 $
333 $
360
841,857
424,740
12,644
3
347
333
5,894,745
$
36,781 $
6,641,847
$
36,781 $
4,106,628
$
34,254 $
4,431,594
34,254
50,779
$
78,595 $
50,779
$
78,595 $
10,716
$
37,842 $
10,716
37,842
7,679,685 $
7,698,610 $
4,881,903 $
4,908,115
Securities sold under agreements to repurchase
Advances from FHLB
$
$
Other borrowings
Subordinated capital notes
Accrued expenses and other liabilities
$
$
$
190,345
$
79,620 $
1,195
$
35,886 $
190,274
$
78,009 $
1,195
$
36,083 $
453,135
$
78,503 $
1,214
$
36,184 $
185,660
$
185,660
$
87,665
$
455,508
77,620
1,214
36,083
87,665
196
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,
2019 and 2018:
• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued
interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings have been
valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of
fair value given the short-term nature of the instruments.
• Investments in FHLB-NY stock are valued at their redemption value.
• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when
available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed
prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable
inputs depending on the market activity of the instrument.
• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing
costs, and other economic factors, which are determined based on current market conditions.
• The fair values of the derivative instruments, which include interest rate swaps and forward-settlement swaps, are based on the net
discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected
cash flows are based on the forward yield curve and discounted using current estimated market rates.
• The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price,
which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is
further segmented into fixed and adjustable interest rates. The fair value is calculated by discounting contractual cash flows,
adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the
credit and interest rate risk inherent in the loan.
• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market
discount rates for deposits of similar remaining maturities.
• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and
subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount
rates for borrowings with similar terms, remaining maturities and put dates.
197
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 30 – BANKING AND FINANCIAL SERVICE REVENUES
The following table presents the major categories of banking and financial service revenues for the years ended December 31, 2019,
2018 and 2017:
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
2019
Year Ended December 31,
2018
(In thousands)
2017
$
6,003 $
5,878 $
658
32,282
531
1,491
1,367
521
13
635
32,431
541
1,581
1,844
718
10
6,903
601
28,174
492
811
1,758
712
17
Total banking service revenues
42,866
43,638
39,468
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
6,826
7,544
10,922
932
-
6,956
6,996
10,878
1,095
9
26,224
25,934
3,854
527
(106)
4,275
5,024
305
(562)
4,767
Total banking and financial service revenues
$
73,365 $
74,339 $
6,652
7,131
10,930
1,048
29
25,790
3,865
923
(738)
4,050
69,308
Oriental recognizes the revenue from banking services, wealth management and mortgage banking based on the nature and timing of
revenue streams from contracts with customer:
Banking Service Revenues
Electronic banking fees are credit and debit card processing services, use of the Bank’s ATMs by non-customers, debit card
interchange income and service charges on deposit accounts. Revenue is recorded once the contracted service has been provided.
Service charges on checking and saving accounts as consumer periodic maintenance revenue is recognized once the service is
rendered, while overdraft and late charges revenue are recorded after the contracted service has been provided.
Other income as credit life commissions, servicing and other loan fees, international fees, and miscellaneous fees recognized as
banking services revenue are out of the scope of the 606 guidelines.
198
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Wealth Management Revenue
Insurance income from commissions and sale of annuities are recorded once the sale has been completed.
Brokers fees consist of two categories:
• Sales commissions generated by advisors for their clients’ purchases and sales of securities and other investment
products, which are collected once the stand-alone transactions are completed at trade date or as earned, and
managed account fees which are fees charged to advisors’ clients’ accounts on the Company corporate advisory
platform. These revenues do not cover future services, as a result there is no need to allocate the amount received to
any other service.
• Fees for providing distribution services related to mutual funds, net of compensation paid to a service provider who
provides such services, as well as trailer fees (also known as 12b-1 fees). These fees are considered variable and are
recognized over time, as the uncertainty of the fees to be received is resolved as the net asset value of the mutual
fund is determined and investor activity occurs. Fees do not cover future services, as a result there is no need to
allocate the amount received to any other service.
Retirement plan and administration fees are revenues related to the payment received from the clients of OPC for assistance with the
planning, design and administration of retirement plans, acting as third-party administrator for such plans, and daily record keeping
services of retirement plans. Fees are collected once the stand-alone transaction was completed at trade date. Fees do not cover future
services, as a result there is no need to allocate the amount received to any other service.
Trust fees are revenues related to fiduciary services provided to 401K retirement plans, a unit investment trust, and retirement plans,
which include investment management, payment of distributions, if any, safekeeping, custodial services of plan assets, servicing of
Trust officers, on-going due diligence of the Trust, and recordkeeping of transactions. Fees are billed based on services contracted.
Negotiated fees are detailed in the contract. Fees collected in advance, are amortized over the term of the contract. Fees are collected
on a monthly basis once the administrative service has been completed. Monthly fee does not include future services.
Investment banking fees as compensation fees are out of the scope of the 606 guidelines.
Mortgage Banking Activities
Mortgage banking activities as servicing fees, gain on sale of mortgage loans valuation and other are out of the scope of the 606
guidelines.
199
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 31 – BUSINESS SEGMENTS
Oriental segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and
Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess
where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic
characteristics of the products were also considered in the determination of the reportable segments. Oriental measures the
performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net
interest income, loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is
based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These
factors are reviewed on a periodical basis and may change if the conditions warrant.
Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage
loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate
mortgage loans for Oriental’s own portfolio. As part of its mortgage banking activities, Oriental may sell loans directly into the
secondary market or securitize conforming loans into mortgage-backed securities.
Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core
operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales
activity, corporate and individual trust and retirement services, as well as retirement plan administration services.
The Treasury segment encompasses all of Oriental’s asset/liability management activities, such as purchases and sales of investment
securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if
the sales or transfers were to third parties, that is, at current market prices.
200
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,
2019, 2018, and 2017:
Year Ended December 31, 2019
Banking
Wealth
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
$
337,448 $
(36,023)
301,425
69 $
-
69
(In thousands)
36,278 $
(14,979)
21,299
373,795 $
(51,002)
322,793
- $
-
-
373,795
(51,002)
322,793
(96,504)
47,517
(211,755)
2,207
-
-
26,649
(17,163)
-
(652)
(288)
8,327
(4,326)
-
(1,555)
(96,792)
82,493
(233,244)
2,207
(2,207)
-
-
-
(2,207)
2,207
(96,792)
82,493
(233,244)
-
-
$
$
$
$
$
$
$
42,890 $
16,084
26,806 $
8,903 $
3,339
5,564 $
23,457 $
1,986
21,471 $
75,250 $
21,409
53,841 $
- $
-
- $
75,250
21,409
53,841
7,486,314 $
33,369 $
2,865,186 $ 10,384,869 $
(1,087,208) $
9,297,661
Banking
Wealth
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
Year Ended December 31, 2018
320,084 $
(29,746)
290,338
(55,885)
53,592
(186,460)
2,126
-
46 $
-
46
(In thousands)
40,289 $
(14,779)
25,510
360,419 $
(44,525)
315,894
-
26,457
(16,440)
-
(788)
(223)
46
(4,181)
-
(1,338)
(56,108)
80,095
(207,081)
2,126
(2,126)
- $
-
-
-
-
-
(2,126)
2,126
360,419
(44,525)
315,894
(56,108)
80,095
(207,081)
-
-
103,711 $
40,447
63,264 $
9,275 $
3,617
5,658 $
19,814 $
4,326
15,488 $
132,800 $
48,390
84,410 $
- $
-
- $
132,800
48,390
84,410
5,863,067 $
25,757 $
1,708,455 $
7,597,279 $
(1,013,927) $
6,583,352
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
Total assets
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
Total assets
201
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2017
Banking
Wealth
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
$
311,503 $
(26,308)
285,195
53 $
-
53
(In thousands)
34,091 $
(15,167)
18,924
345,647 $
(41,475)
304,172
- $
-
-
345,647
(41,475)
304,172
(113,108)
45,102
(184,567)
1,604
(748)
-
26,069
(13,486)
-
(1,137)
(31)
7,516
(3,578)
748
(467)
(113,139)
78,687
(201,631)
2,352
(2,352)
-
-
-
(2,352)
2,352
(113,139)
78,687
(201,631)
-
-
$
$
$
33,478 $
13,057
20,421 $
11,499 $
4,485
7,014 $
23,112 $
(2,099)
25,211 $
68,089 $
15,443
52,646 $
- $
-
- $
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, net
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income
taxes
Income tax expense
Net income
Total assets
NOTE 32 – OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
As a bank holding company subject to the regulations and supervisory guidance of the Federal Reserve Board, Oriental generally
should inform the Federal Reserve Board and eliminate, defer or significantly reduce its dividends if: (i) its net income available to
shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
(ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial
condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The payment of
dividends by the Bank to Oriental may also be affected by other regulatory requirements and policies, such as the maintenance of
certain regulatory capital levels. During 2019, 2018, and 2017, Oriental Insurance paid $4.0 million, respectively, in dividends to
Oriental. Oriental Financial Services did not pay any dividends during 2019, 2018, and 2017.
The following condensed financial information presents the financial position of the holding company only as of December 31, 2019
and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019, 2018 and 2017:
202
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Dividend payable
Due to affiliates
Accrued expenses and other liabilities
Subordinated capital notes
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
(In thousands)
27,932
1,027,633
32,803
40
-
676
1,089,084
$
$
39,207
983,718
19,341
40
(1)
1,123
1,043,428
5,222
-
2,301
36,083
43,606
1,045,478
1,089,084
$
5,219
14
2,235
36,083
43,551
999,877
1,043,428
$
$
$
203
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG BANCORP
CONDENSED STATEMENTS OF OPERATIONS INFORMATION
(Holding Company Only)
Income:
Interest income
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
2019
Year Ended December 31,
2018
(In thousands)
2017
$
828 $
477 $
5,308
6,136
2,012
7,516
9,528
(3,392)
1,705
(5,097)
6,003
6,480
1,905
7,980
9,885
(3,405)
2,400
(5,805)
56,114
2,824
53,841 $
87,128
3,087
84,410 $
$
188
4,511
4,699
1,556
6,700
8,256
(3,557)
403
(3,960)
51,612
4,994
52,646
OFG BANCORP
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME INFORMATION
(Holding Company Only)
Net income
Other comprehensive loss before tax:
Other comprehensive income from bank subsidiary
Other comprehensive loss before taxes
Income tax effect
Other comprehensive loss after taxes
Comprehensive income
2019
Year Ended December 31,
2018
(In thousands)
2017
$
53,841 $
84,410 $
52,646
9,955
9,955
-
9,955
63,796 $
(8,014)
(8,014)
-
(8,014)
76,396 $
(4,545)
(4,545)
-
(4,545)
48,101
$
204
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
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:
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
NOTE 33 – SUBSEQUENT EVENTS
2019
Year Ended December 31,
2018
(In thousands)
2017
$
53,841 $
84,410 $
52,646
(56,114)
(2,824)
2,134
-
-
458
64
20,000
6,017
23,576
-
(14)
310
(1,720)
(13,518)
(319)
(15,261)
(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)
1,294
508
-
(20,884)
(19,590)
(11,275)
39,207
27,932 $
(24,820)
(24,312)
14,777
24,430
39,207 $
(24,412)
(24,412)
1,857
22,573
24,430
$
On January 6 and 7 of 2020, significant earthquakes struck the island of Puerto Rico with significant damages in the
southwestern part of the island. Oriental’s digital channels, core banking and electronic funds transfer systems and branches
continued to function uninterrupted during and after the earthquakes. There were no structural damages to the Oriental’s facilities.
Oriental maintains insurance for its properties, including business interruption. Oriental made an assessment with information
available for the impact of recent earthquakes on its credit portfolio and determined that they were not significant. The
documentation for the assessment considers all information available at the moment; gathered through visits or interviews with our
clients, inspections of collaterals, identification of most affected areas. Oriental will continue to assess the impact to our customers as
more information becomes available.
205
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Oriental’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2019, an evaluation was carried out under
the supervision and with the participation of Oriental’s management, including the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”), of the effectiveness of the design and operation of Oriental’s disclosure controls and procedures. Based
upon such evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this annual report on Form 10-K,
Oriental’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by Oriental in the reports that it files or submits under the
Securities Exchange Act of 1934. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that it will detect or uncover failures within Oriental to disclose material information
otherwise required to be set forth in Oriental’s periodic reports.
Management’s Annual Report on Internal Control over Financial Reporting
The Management’s Annual Report on Internal Control over Financial Reporting is included in Item 8 of this report.
Report of the Registered Public Accounting Firm
The registered public accounting firm’s report on Oriental’s internal control over financial reporting is included in Item 8 of this
report.
Changes in Internal Control over Financial Reporting
The internal control over financial reporting of the acquired Scotiabank PR & USVI was excluded from the evaluation of effectiveness
of Oriental’s disclosure controls and procedures as of the period end covered by this report because of the timing of the acquisition.
As a result of the Scotiabank PR & USVI Acquisition, Oriental will be evaluating changes to processes, information technology
systems, and other components of internal controls in financial reporting as part of its integration process.
There have not been any changes in Oriental’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the last quarter of the year ended December 31, 2019, that has materially affected, or is
reasonably likely to materially affect, Oriental’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
206
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
207
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Oriental’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and
further amended in 2010.
The following table shows certain information pertaining to the awards under the Omnibus Plan as of December 31, 2019:
(a)
(b)
(c)
Number of Securities
Number of Securities to
be
Weighted-Average
Remaining Available for
Issued Upon Exercise of
Exercise Price of
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 634,294 stock options and 379,150 restricted stock units.
(2) Exercise price related to stock options.
1,013,444 (1) $
$
1,013,444
9.14 (2) $
9.14
707,046
707,046
Oriental recorded $2.134 million, $1.401 million and $1.109 million related to stock-based compensation expense during the years
ended December 31, 2019, 2018 and 2017, respectively.
Other information required by this Item is incorporated herein by reference to Oriental’s definitive proxy statement to be filed with the
SEC no later than 120 days after the end of the fiscal year covered by this report.
208
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, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to the Consolidated Financial Statements
Financial Statement Schedules
No schedules are presented because the information is not applicable or is included in the accompanying consolidated financial
statements or in the notes thereto described above.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
209
Exhibits
Exhibit No.:
Description Of Document:
2.1
2.2
2.3
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
12.1
21.1
23.1
31.1
Stock Purchase Agreement dated June 26, 2019, between The Bank of Nova Scotia and Oriental Bank, and, solely for
the purposes expressly provided therein, OFG Bancorp. (1)
Sale and Purchase Agreement (USVI) dated June 26, 2019, between The Bank of Nova Scotia and Oriental Bank,
and, solely for the purposes expressly provided therein, OFG Bancorp. (2)
Sale and Purchase Agreement (PR) dated June 26, 2019, between The Bank of Nova Scotia and Oriental Bank, and,
solely for the purposes expressly provided therein, OFG Bancorp. (3)
Composite Certificate of Incorporation. (4)
By-Laws.(5)
Certificate of Designation of the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(6)
Certificate of Designation of the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(7)
Certificate of Designations of 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(8)
Form of Certificate for the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(9)
Form of Certificate for the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(10)
Form of Certificate for the 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(8)
Change in Control Compensation Agreement between Oriental and José R. Fernández.(11)
Change in Control Compensation Agreement between Oriental and Ganesh Kumar (12)
Technology Outsourcing Agreement dated as of January 26, 2007, between Oriental and Metavante Corporation.(13)
OFG Bancorp 2007 Omnibus Performance Incentive Polan, as amended and restated.(14)
Form of qualified stock option award and agreement (15)
Form of restricted stock award and agreement (16)
Form of restricted unit award and agreement (17)
Form of performance shares award and agreement (18)
Employment Agreement dated as of February 28, 2018 between Oriental and José R. Fernández (19)
Amendment dated as of May 31, 2018 to Technology Outsourcing Agreement between Oriental and Metavante
Corporation (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.
210
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, 2019, 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)
(8)
Incorporated herein by reference to Exhibit 2.1 of Oriental’s current report on Form 8-K filed with the SEC on July 2, 2019. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
Incorporated herein by reference to Exhibit 2.2 of Oriental’s current report on Form 8-K filed with the SEC on July 2, 2019. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
Incorporated herein by reference to Exhibit 2.3 of Oriental’s current report on Form 8-K filed with the SEC on July 2, 2019. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
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.
(9)
Incorporated herein by reference to Exhibit 4.2 of Oriental’s registration statement on Form S-3 filed with the SEC on April 2, 1999.
(10) Incorporated herein by reference to Exhibit 4.2 of Oriental’s registration statement on Form S-3, as amended, filed with the SEC on September 23, 2003.
(11) Incorporated herein by reference to Exhibit 10.12 of Oriental’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(12) Incorporated herein by reference to Exhibit 10.14 of Oriental’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(13) Incorporated herein by reference to Exhibit 10.23 of Oriental’s annual report on Form 10-K filed with the SEC on March 28, 2007. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
(14) Incorporated herein by reference to Exhibit 4.1 of Oriental’s registration statement on Form S-8 filed with the SEC on October 7, 2013.
(15) Incorporated herein by reference to Exhibit 10.1 of Oriental’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(16) Incorporated herein by reference to Exhibit 10.2 of Oriental’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(17) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on May 8, 2015.
(18) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on November 2, 2018.
(19) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on May 4, 2018.
(20) Incorporated herein by reference to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with the SEC on August 3, 2018. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment.
211
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 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
212
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
By: /s/ Susan S. Harnett
Susan s. Harnett
Director
By: /s/ Christa Steele
Christa Steele
Director
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
Dated: March 2, 2020
213
EXHIBIT 21.1
A) ORIENTAL BANK – an FDIC insured non-member commercial bank organized and existing under the laws of the
Commonwealth of Puerto Rico.
LIST OF SUBSIDIARIES
SUBSIDIARIES OF ORIENTAL BANK:
1. Oriental International Bank Inc. – an international banking entity organized and existing under the laws of the
Commonwealth of Puerto Rico.
2. OFG USA, LLC - a limited liability corporation organized and existing under the laws of the State of Delaware.
B) ORIENTAL FINANCIAL SERVICES CORP. - a registered securities broker-dealer organized and existing under the laws of
the Commonwealth of Puerto Rico.
C) ORIENTAL INSURANCE, LLC – a registered insurance agency organized and existing under the laws of the Commonwealth
of Puerto Rico.
D) ORIENTAL PENSION CONSULTANTS, INC – a corporation organized and existing under the laws of the State of Florida.
E) ORIENTAL FINANCIAL (PR) STATUTORY TRUST II – a special purpose statutory trust organized under the laws of the
State of Connecticut.
F) OFG VENTURES LLC – a limited liability corporation organized and existing under the laws of the State of Delaware.
1
I. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
The Board of Directors
OFG Bancorp:
We consent to the incorporation by reference in the registration statements on Forms S-8 (No. 333-191603, 333-170064, 333-147727,
333-102696, 333-57052, and 333-84473) of OFG Bancorp and subsidiaries (the Company) of our reports dated March 2, 2020, with
respect to the consolidated statements of financial condition of the Company as of December 31, 2019 and 2018, and the related
statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-
year period ended December 31, 2019, and the effectiveness of internal control over financial reporting, as of December 31, 2019,
which reports appear in the December 31, 2019 annual report on Form 10-K of the Company.
/s/ KPMG LLP
San Juan, Puerto Rico
March 2, 2020
1
MANAGEMENT CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, José Rafael Fernández, President and Chief Executive Officer of OFG Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of OFG Bancorp;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U. S.
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal year that has materially affected, or is reasonably likely to
materially affect the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 2, 2020
By: /s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
1
MANAGEMENT CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Maritza Arizmendi, Executive Vice President and Chief Financial Officer of OFG Bancorp, certify that:
1 I have reviewed this annual report on Form 10-K of OFG Bancorp;
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3 . Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal year that has materially affected, or is reasonably likely to
materially affect the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 2, 2020
By: /s/ Maritza Arizmendi
Maritza Arizmendi
Executive Vice President and Chief Financial Officer
1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. §1350)
EXHIBIT 32.1
In connection with OFG Bancorp’s annual report on Form 10-K for the year ended December 31, 2019, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, José Rafael Fernández, President and Chief Executive
Officer of OFG Bancorp, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of OFG Bancorp.
In witness whereof, I execute this certification in San Juan, Puerto Rico, this 2nd day of March 2020.
By: /s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. §1350)
EXHIBIT 32.2
In connection with OFG Bancorp’s annual report on Form 10-K for the year ended December 31, 2019, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Maritza Arizmendi, Executive Vice President and Chief
Financial Officer of OFG Bancorp, hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of OFG Bancorp.
In witness whereof, I execute this certification in San Juan, Puerto Rico, this 2nd day of March 2020.
By: /s/ Maritza Arizmendi
Maritza Arizmendi
Executive Vice President and Chief Financial Officer
1