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OFG OFG Bancorp

Filed: 6 Nov 20, 11:55am
0001030469 us-gaap:ConsumerPortfolioSegmentMember us-gaap:BankOverdraftsMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-12-31

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

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

EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-12647

 

OFG Bancorp

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

 

Principal Executive Offices:

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares, par value $1.00 per share

OFG

New York Stock Exchange

7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)

 

OFG.PRA

New York Stock Exchange

7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)

 

OFG.PRB

New York Stock Exchange

7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)

 

OFG.PRD

New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 such files). Yes No

 

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

 

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

 

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

 

51,347,086 common shares ($1.00 par value per share) outstanding as of October 31, 2020

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

 

 

Unaudited Consolidated Statements of Financial Condition

3

 

Unaudited Consolidated Statements of Operations

5

 

Unaudited Consolidated Statements of Comprehensive Income

7

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

8

 

Unaudited Consolidated Statements of Cash Flows

9

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Note 1 – Significant Accounting Policies

12

 

 

Note 2 – Business Combinations

19

 

 

Note 3 – Restricted Cash

22

 

 

Note 4 – Investment Securities

22

 

 

Note 5 – Loans

27

 

 

Note 6 – Allowance for Credit Losses

41

 

 

Note 7 – Foreclosed Real Estate

44

 

 

Note 8 – Servicing Assets

44

 

 

Note 9 – Derivatives

46

 

 

Note 10 – Core Deposit, customer relationship intangible and other intangibles

47

 

 

Note 11 – Accrued Interest Receivable and Other Assets

47

 

 

Note 12 – Deposits and Related Interest

48

 

 

Note 13 – Borrowings and Related Interest

49

 

 

Note 14 – Offsetting of Financial Assets and Liabilities

51

 

 

Note 15 – Income Taxes

53

 

 

Note 16 – Regulatory Capital Requirements

54

 

 

Note 17 – Stockholders’ Equity

57

 

 

Note 18 – Accumulated Other Comprehensive Income

58

 

 

Note 19 – Earnings per Common Share

61

 

 

Note 20 – Guarantees

61

 

 

Note 21 – Commitments and Contingencies

64

 

 

Note 22 – Operating Leases

65

 

 

Note 23 – Fair Value of Financial Instruments

68

 

 

Note 24 – Banking and Financial Service Revenues

74

 

 

Note 25 – Business Segments

76

 

 

 

Item 2.

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

79

 

 

Critical Accounting Policies and Estimates

81

 

 

Selected Financial Data

84

 

 

Financial Highlights of the Third Quarter of 2020

86

 

 

Analysis of Results of Operations

87

 

 

Analysis of Financial Condition

103

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

125

Item 4.

Controls and Procedures

129

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

131

Item 1A.

Risk Factors

131

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

132

Item 3.

Default upon Senior Securities

132

Item 4.

Mine Safety Disclosures

132

Item 5.

Other Information

132

Item 6.

Exhibits

133

Signatures

134

 

 


 

FORWARD-LOOKING STATEMENTS

 

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or “Oriental”), including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on 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;

unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics, which could cause a disruption in our operations or other adverse consequences for our business;

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;

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;

the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S., P.R., and/or global economy, financial market conditions and our business, results of operations and financial condition; and

the impact of the actions taken by federal and local governmental authorities to try and contain the virus or address the impact of the virus on the United States and Puerto Rico economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

 

 

1


 

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; risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets; 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.

Other factors not identified above, including those described under the headings “Risk Factors”, "Quantitative and Qualitative Disclosures about Market Risk" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and in our Annual Report on Form 10-K for the year ended December 31, 2019 may also cause actual results to differ materially from those described in our forward-looking statements.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to Oriental as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, Oriental assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

2


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

 

 

 

September 30,

 

December 31,

 

 

2020

 

2019

 

 

(In thousands)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

Cash and due from banks

 

$

2,267,383

 

$

844,532

Money market investments

 

 

14,617

 

 

6,775

Total cash and cash equivalents

 

 

2,282,000

 

 

851,307

Restricted cash

 

 

1,050

 

 

1,450

Investments:

 

 

 

 

 

 

Trading securities, at fair value, with amortized cost of $162 (December 31, 2019 - $182)

 

 

22

 

 

37

Investment securities available-for-sale, at fair value, with amortized cost of $412,900

 

 

 

 

 

 

(December 31, 2019, amortized cost $1,074,475); no allowance for credit losses for any period

 

 

423,815

 

 

1,074,169

Federal Home Loan Bank (FHLB) stock, at cost

 

 

8,322

 

 

13,048

Other investments

 

 

2,205

 

 

560

Total investments

 

 

434,364

 

 

1,087,814

Loans:

 

 

 

 

 

 

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

 

 

54,526

 

 

19,591

Loans held for investment, net of allowance for credit losses of $235,313 (December 31, 2019 - $116,539)

 

 

6,524,614

 

 

6,622,256

Total loans

 

 

6,579,140

 

 

6,641,847

Other assets:

 

 

 

 

 

 

Foreclosed real estate

 

 

19,456

 

 

29,909

Accrued interest receivable

 

 

71,830

 

 

37,120

Deferred tax asset, net

 

 

178,957

 

 

176,740

Premises and equipment, net

 

 

83,270

 

 

81,105

Customers' liability on acceptances

 

 

18,291

 

 

21,599

Core deposit, customer relationship and other intangibles

 

 

48,650

 

 

56,965

Servicing assets

 

 

47,242

 

 

50,779

Goodwill

 

 

86,069

 

 

86,069

Operating lease right-of-use assets

 

 

35,900

 

 

39,112

Other assets

 

 

132,772

 

 

135,845

Total assets

 

$

10,018,991

 

$

9,297,661

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

3


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 (CONTINUED)

 

 

 

September 30,

 

December 31,

 

 

2020

 

2019

 

 

(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand deposits

 

$

4,682,991

 

$

3,579,115

Savings accounts

 

 

1,949,362

 

 

1,836,480

Time deposits

 

 

2,000,104

 

 

2,283,015

Total deposits

 

 

8,632,457

 

 

7,698,610

Borrowings:

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

 

0

 

 

190,274

Advances from FHLB

 

 

66,543

 

 

78,009

Subordinated capital notes

 

 

36,083

 

 

36,083

Other borrowings

 

 

238

 

 

1,195

Total borrowings

 

 

102,864

 

 

305,561

Other liabilities:

 

 

 

 

 

 

Derivative liabilities

 

 

1,895

 

 

913

Acceptances executed and outstanding

 

 

18,291

 

 

21,599

Operating lease liabilities

 

 

37,029

 

 

39,840

Accrued expenses and other liabilities

 

 

162,133

 

 

185,660

Total liabilities

 

 

8,954,669

 

 

8,252,183

Commitments and contingencies (See Note 21)

 

 

nil

 

 

nil

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, 2019 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value

 

 

92,000

 

 

92,000

Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,344,586 shares outstanding (December 31, 2019 - 59,885,234;

 

 

 

 

 

 

51,398,956 )

 

 

59,885

 

 

59,885

Additional paid-in capital

 

 

621,978

 

 

621,515

Legal surplus

 

 

101,233

 

 

95,779

Retained earnings

 

 

284,053

 

 

279,646

Treasury stock, at cost, 8,540,648 shares (December 31, 2019 - 8,486,278 shares)

 

 

(103,095)

 

 

(102,339)

Accumulated other comprehensive income (loss), net of tax of $-753 (December 31, 2019 - $206)

 

 

8,268

 

 

(1,008)

Total stockholders’ equity

 

 

1,064,322

 

 

1,045,478

Total liabilities and stockholders’ equity

 

$

10,018,991

 

$

9,297,661

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

4


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

(In thousands, except per share data)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Loans

$

112,047

 

$

85,772

 

$

347,014

 

$

254,971

Mortgage-backed securities

 

1,498

 

 

3,553

 

 

5,890

 

 

17,465

Investment securities and other

 

1,392

 

 

4,330

 

 

7,422

 

 

10,184

Total interest income

 

114,937

 

 

93,655

 

 

360,326

 

 

282,620

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

14,620

 

 

10,554

 

 

46,685

 

 

29,594

Securities sold under agreements to repurchase

 

0

 

 

1,342

 

 

1,335

 

 

6,234

Advances from FHLB and other borrowings

 

476

 

 

550

 

 

1,521

 

 

1,671

Subordinated capital notes

 

308

 

 

499

 

 

1,091

 

 

1,537

Total interest expense

 

15,404

 

 

12,945

 

 

50,632

 

 

39,036

Net interest income

 

99,533

 

 

80,710

 

 

309,694

 

 

243,584

Provision for credit losses

 

13,669

 

 

43,770

 

 

78,496

 

 

73,724

Net interest income after provision for credit losses

 

85,864

 

 

36,940

 

 

231,198

 

 

169,860

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

Banking service revenue

 

16,297

 

 

10,813

 

 

45,678

 

 

32,054

Wealth management revenue

 

7,272

 

 

6,611

 

 

20,924

 

 

19,162

Mortgage banking activities

 

3,917

 

 

1,118

 

 

10,223

 

 

2,953

Total banking and financial service revenues

 

27,486

 

 

18,542

 

 

76,825

 

 

54,169

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on:

 

 

 

 

 

 

 

 

 

 

 

Sale of securities

 

0

 

 

3,498

 

 

4,728

 

 

8,274

Early extinguishment of debt

 

0

 

 

0

 

 

(63)

 

 

(7)

Bargain purchase from Scotiabank PR & USVI acquisition

 

3,465

 

 

0

 

 

7,336

 

 

0

Other non-interest income

 

375

 

 

138

 

 

1,102

 

 

346

Total non-interest income, net

 

31,326

 

 

22,178

 

 

89,928

 

 

62,782

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

5


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (CONTINUED)

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

(In thousands, except per share data)

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

31,955

 

 

20,500

 

 

102,005

 

 

60,716

Occupancy, equipment and infrastructure costs

 

11,943

 

 

7,307

 

 

35,220

 

 

22,564

Electronic banking charges

 

8,734

 

 

5,505

 

 

26,284

 

 

15,698

Information technology expenses

 

5,381

 

 

2,247

 

 

16,259

 

 

6,953

Professional and service fees

 

3,331

 

 

3,662

 

 

12,596

 

 

10,297

Taxes, other than payroll and income taxes

 

3,774

 

 

2,235

 

 

10,123

 

 

6,530

Insurance

 

2,428

 

 

(366)

 

 

8,667

 

 

2,057

Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses

 

1,323

 

 

2,889

 

 

6,763

 

 

8,839

Loan servicing and clearing expenses

 

2,345

 

 

1,194

 

 

4,836

 

 

3,562

Advertising, business promotion, and strategic initiatives

 

1,481

 

 

1,333

 

 

4,643

 

 

3,859

Communication

 

1,117

 

 

956

 

 

2,993

 

 

2,556

Printing, postage, stationary and supplies

 

1,094

 

 

672

 

 

2,767

 

 

1,885

Director and investor relations

 

302

 

 

374

 

 

928

 

 

934

Merger and restructuring charges

 

2,681

 

 

1,556

 

 

5,991

 

 

2,556

Pandemic expenses

 

2,090

 

 

0

 

 

4,266

 

 

0

Other

 

3,465

 

 

663

 

 

11,906

 

 

5,325

Total non-interest expense

 

83,444

 

 

50,727

 

 

256,247

 

 

154,331

Income before income taxes

 

33,746

 

 

8,391

 

 

64,879

 

 

78,311

Income tax expense

 

6,308

 

 

1,008

 

 

13,853

 

 

23,479

Net income

 

27,438

 

 

7,383

 

 

51,026

 

 

54,832

Less: dividends on preferred stock

 

(1,628)

 

 

(1,628)

 

 

(4,884)

 

 

(4,884)

Income available to common shareholders

$

25,810

 

$

5,755

 

$

46,142

 

$

49,948

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.50

 

$

0.11

 

$

0.90

 

$

0.97

Diluted

$

0.50

 

$

0.11

 

$

0.89

 

$

0.97

Average common shares outstanding and equivalents

 

51,527

 

 

51,772

 

 

51,563

 

 

51,695

Cash dividends per share of common stock

$

0.07

 

$

0.07

 

$

0.21

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

6


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

27,438

 

$

7,383

 

$

51,026

 

$

54,832

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

 

 

 

 

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

 

661

 

 

5,111

 

 

15,949

 

 

19,063

Realized gain on sale of securities available-for-sale

 

0

 

 

(3,498)

 

 

(4,728)

 

 

(8,274)

Unrealized (loss) gain on cash flow hedges

 

181

 

 

(188)

 

 

(987)

 

 

(1,160)

Other comprehensive income before taxes

 

842

 

 

1,425

 

 

10,234

 

 

9,629

Income tax effect

 

(162)

 

 

(197)

 

 

(958)

 

 

(1,124)

Other comprehensive income after taxes

 

680

 

 

1,228

 

 

9,276

 

 

8,505

Comprehensive income

$

28,118

 

$

8,611

 

$

60,302

 

$

63,337

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

7


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

(In thousands)

Preferred stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

92,000

 

$

92,000

 

$

92,000

 

$

92,000

Balance at end of period

 

92,000

 

 

92,000

 

 

92,000

 

 

92,000

Common stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

59,885

 

 

59,885

 

 

59,885

 

 

59,885

Balance at end of period

 

59,885

 

 

59,885

 

 

59,885

 

 

59,885

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

621,860

 

 

620,368

 

 

621,515

 

 

619,381

Stock-based compensation expense

 

144

 

 

580

 

 

1,468

 

 

1,567

Lapsed restricted stock units

 

(26)

 

 

0

 

 

(1,005)

 

 

0

Balance at end of period

 

621,978

 

 

620,948

 

 

621,978

 

 

620,948

Legal surplus:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

98,347

 

 

95,019

 

 

95,779

 

 

90,167

Transfer from retained earnings

 

2,886

 

 

764

 

 

5,454

 

 

5,616

Balance at end of period

 

101,233

 

 

95,783

 

 

101,233

 

 

95,783

Retained earnings:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

264,724

 

 

284,459

 

 

279,646

 

 

253,040

Topic 326 adoption

 

0

 

 

0

 

 

(25,494)

 

 

0

Topic 842 adoption

 

0

 

 

0

 

 

0

 

 

(736)

Balance at beginning of period (as adjusted for change in accounting principle)

 

264,724

 

 

284,459

 

 

254,152

 

 

252,304

Net income

 

27,438

 

 

7,383

 

 

51,026

 

 

54,832

Cash dividends declared on common stock

 

(3,595)

 

 

(3,596)

 

 

(10,787)

 

 

(10,782)

Cash dividends declared on preferred stock

 

(1,628)

 

 

(1,628)

 

 

(4,884)

 

 

(4,884)

Transfer to legal surplus

 

(2,886)

 

 

(764)

 

 

(5,454)

 

 

(5,616)

Balance at end of period

 

284,053

 

 

285,854

 

 

284,053

 

 

285,854

Treasury stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

(103,121)

 

 

(103,171)

 

 

(102,339)

 

 

(103,633)

Stock repurchased

 

0

 

 

0

 

 

(2,226)

 

 

0

Lapsed restricted stock units and options

 

26

 

 

235

 

 

1,470

 

 

697

Balance at end of period

 

(103,095)

 

 

(102,936)

 

 

(103,095)

 

 

(102,936)

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

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

7,588

 

 

(3,686)

 

 

(1,008)

 

 

(10,963)

Other comprehensive income, net of tax

 

680

 

 

1,228

 

 

9,276

 

 

8,505

Balance at end of period

 

8,268

 

 

(2,458)

 

 

8,268

 

 

(2,458)

Total stockholders’ equity

$

1,064,322

 

$

1,049,076

 

$

1,064,322

 

$

1,049,076

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

8


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

 

 

 

 

 

 

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

Net income

$

51,026

 

$

54,832

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

 

 

 

 

 

Amortization of deferred loan origination fees and fair value (discounts) premiums on loans

 

(7,606)

 

 

3,250

Amortization of fair value premiums on acquired deposits

 

(1,955)

 

 

0

Amortization of investment securities premiums, net of accretion of discounts

 

4,142

 

 

3,905

Amortization of core deposit, customer relationships and other intangibles

 

8,315

 

 

877

Net change in operating leases

 

401

 

 

(95)

Depreciation and amortization of premises and equipment

 

9,382

 

 

6,265

Deferred income tax expense, net

 

12,127

 

 

476

Provision for credit losses

 

78,496

 

 

73,724

Stock-based compensation

 

1,468

 

 

1,567

Bargain purchase from Scotiabank PR & USVI acquisition

 

(7,336)

 

 

0

(Gain) loss on:

 

 

 

 

 

Sale of securities

 

(4,728)

 

 

(8,274)

Sale of loans

 

(2,202)

 

 

(380)

Early extinguishment of debt

 

63

 

 

7

Foreclosed real estate and other repossessed assets

 

1,078

 

 

2,666

Sale of other assets

 

(7)

 

 

(80)

Originations and purchases of loans held-for-sale

 

(143,394)

 

 

(59,879)

Proceeds from sale of loans held-for-sale

 

2,188

 

 

15,208

Net (increase) decrease in:

 

 

 

 

 

Trading securities

 

15

 

 

319

Other investments

 

0

 

 

(54)

Accrued interest receivable

 

(29,996)

 

 

3,784

Servicing assets

 

3,537

 

 

591

Other assets

 

3,320

 

 

463

Net increase (decrease) in:

 

 

 

 

 

Accrued interest on deposits and borrowings

 

(4,038)

 

 

(1,875)

Accrued expenses and other liabilities

 

13,438

 

 

(56,288)

Net cash (used in) provided by operating activities

 

(12,266)

 

 

41,009

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

9


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (CONTINUED)

 

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

(In thousands)

Cash flows from investing activities:

 

 

 

 

 

Purchases of:

 

 

 

 

 

Investment securities available-for-sale

 

60,282

 

 

(1,117)

FHLB stock

 

0

 

 

(1,167)

Other investments

 

(1,645)

 

 

0

Maturities and redemptions of:

 

 

 

 

 

Investment securities available-for-sale

 

389,139

 

 

129,027

FHLB stock

 

4,726

 

 

3,286

Proceeds from sales of:

 

 

 

 

 

Investment securities available-for-sale

 

320,984

 

 

680,466

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

 

25,517

 

 

37,115

Loans held-for-investment

 

0

 

 

14,668

Fully charged-off loans

 

0

 

 

2,382

Premises and equipment

 

7

 

 

2,113

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

 

(1,101,167)

 

 

(834,486)

Principal repayment of loans

 

1,060,606

 

 

722,367

Additions to premises and equipment

 

(11,512)

 

 

(9,160)

Outlays for business acquisitions

 

402

 

 

0

Net cash provided by investing activities

$

747,339

 

$

745,494

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

Deposits

 

915,076

 

 

5,242

Securities sold under agreements to repurchase

 

(190,063)

 

 

(264,730)

FHLB advances, federal funds purchased, and other borrowings

 

(12,361)

 

 

775

Exercise of stock options with treasury shares

 

465

 

 

697

Purchase of treasury stock

 

(2,226)

 

 

0

Dividends paid on preferred stock

 

(4,884)

 

 

(4,881)

Dividends paid on common stock

 

(10,787)

 

 

(10,782)

Net cash provided by (used in) financing activities

$

695,220

 

$

(273,679)

Net change in cash, cash equivalents and restricted cash

 

1,430,293

 

 

512,824

Cash, cash equivalents and restricted cash at beginning of period

 

852,757

 

 

450,063

Cash, cash equivalents and restricted cash at end of period

$

2,283,050

 

$

962,887

Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:

 

 

 

 

 

Cash and due from banks

$

2,267,383

 

$

953,802

Money market investments

 

14,617

 

 

8,035

Restricted cash

 

1,050

 

 

1,050

Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

$

2,283,050

 

$

962,887

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

 

 

 

 

 

Interest paid

$

40,385

 

$

39,710

Income taxes paid

$

5,941

 

$

36,924

Operating lease liabilities paid

$

9,747

 

$

5,174

Mortgage loans securitized into mortgage-backed securities

$

108,244

 

$

45,716

Transfer from held-to-maturity securities to available-for-sale securities

$

0

 

$

424,740

Transfer from loans to foreclosed real estate and other repossessed assets

$

14,733

 

$

34,532

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

$

261

 

$

25,933

10


 

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

$

0

 

$

49

Financed sales of foreclosed real estate

$

0

 

$

1,016

Interest capitalized on loans subject to the temporary payment moratorium

$

35,593

 

$

0

Loans booked under the GNMA buy-back option

$

62,651

 

$

11,403

Initial recognition of operating lease right-of-use assets

$

0

 

$

21,930

Initial recognition of operating lease liabilities

$

0

 

$

23,689

See notes to unaudited consolidated financial statements

 

11


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 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 LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and OFG Ventures LLC (“OFG Ventures”). Oriental also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”) through which it issued trust preferred securities. Through its operating 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.

 

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, Oriental acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” On December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). Immediately following the closing of the Scotiabank Acquisition, Oriental merged SBPR 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, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank PR & USVI Acquisition.” These acquired businesses have been integrated for financial reporting purposes.

 

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of Coronavirus (Covid-19). The pandemic has significantly impacted economic conditions in P.R. and the U.S., creating significant uncertainties. After recent disruptions in economic conditions caused by Covid-19, Oriental offered several deferral programs for the payment of principal and interest for all of its loan portfolios for customers whose payments were not over 89 days past due at March 12, 2020. Refer to footnotes for further disclosure associated to this event.

Basis of Presentation

The accompanying unaudited consolidated financial statements of Oriental have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of Oriental on a consolidated basis, and all such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Operating results for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC and has recorded or disclosed those material events or transactions as described within the accompanying consolidated financial statements and notes.

 

Significant Accounting Policies

Oriental’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

 

12


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

New Accounting Updates Adopted in 2020

 

Accounting for Financial Instruments -- Credit Losses

On January 1, 2020, Oriental adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities, receivables and other financial assets measured at amortized cost at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior multiple existing impairment methods, which generally required that a loss be incurred before it was recognized. The CECL standard also requires credit losses related to AFS debt securities to be recorded through an allowance for credit losses. Our adoption of this standard on January 1, 2020 did not have an impact on our portfolio of AFS debt securities.

 

We adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect reduction to retained earnings totaling $25.5 million, as detailed in the table below. Operating results for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2019 Form 10-K.

 

 

13


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table details the impact of the adoption of CECL on the assets, liabilities and retained earnings as of January 1, 2020.

 

January 1, 2020

 

Pre-Adoption

 

Impact of adoption

 

Post-Adoption

 

Cumulative Effect on Retained Earnings

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

$

1,074,169

 

$

0

 

$

1,074,169

 

$

0

Deferred tax asset

 

176,740

 

 

13,874

 

 

190,614

 

 

13,874

Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

2,222,085

 

 

42,143

 

 

2,264,228

 

 

0

Mortgage

 

2,508,821

 

 

7,830

 

 

2,516,651

 

 

0

Consumer

 

504,507

 

 

181

 

 

504,688

 

 

0

Auto

 

1,522,973

 

 

368

 

 

1,523,341

 

 

0

 

 

6,758,386

 

 

50,522

 

 

6,808,908

 

 

0

Allowance for credit losses on loans

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

(34,886)

 

 

(45,705)

 

 

(80,591)

 

 

(3,562)

Mortgage

 

(30,382)

 

 

(18,810)

 

 

(49,192)

 

 

(10,980)

Consumer

 

(18,446)

 

 

(8,599)

 

 

(27,045)

 

 

(8,418)

Auto

 

(32,825)

 

 

(16,606)

 

 

(49,431)

 

 

(16,238)

 

 

(116,539)

 

 

(89,720)

 

 

(206,259)

 

 

(39,198)

Net loans

 

6,641,847

 

 

(39,198)

 

 

6,602,649

 

 

(39,198)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses on off-balance sheet credit exposures

 

3,688

 

 

170

 

 

3,858

 

 

170

 

$

7,889,068

 

$

(25,494)

 

$

7,863,574

 

$

(25,494)

In connection with the adoption of CECL, we revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.

 

Investment securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Oriental had no securities classified as held to maturity on September 30, 2020 or December 31, 2019. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, 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.

 

14


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Allowance for credit losses – available-for-sale securities: For available-for-sale investment securities in an unrealized loss position, Oriental first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available-for-sale that do not meet the aforementioned criteria, Oriental evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of security. If the present value of cash flows expected to be collected is less than amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

 

All securities held by Oriental are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.

 

Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $1.6 million and $4.1 million on September 30, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition.

 

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses, except for accrued interest receivable on loans that participated in the Covid-19 deferral programs. Oriental has elected to estimate expected credit losses on accrued interest receivable for loans that participated in the Covid-19 deferral programs separately from other components of the amortized costs basis. Accrued interest receivable totaled $70.2 million and $32.7 million on September 30, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition. Accrued interest receivable on loans that participated in the Covid-19 deferral programs amounted to $43.1 million at September 30, 2020, $39.2 million corresponds to loans in current status. Allowance for credit losses for accrued interest receivable on loans that participated in the Covid-19 deferral programs amounted to $826 thousand at September 30, 2020. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income through the life of the loan.

 

Loans held for investment that were not purchased with credit deterioration are referred to as Non-PCD loans and loans that were purchased with credit deterioration are referred to as PCD loans.

 

Oriental discontinues accrual of interest after payments become more than 90 days past due or earlier if Oriental does not expect the full collection of principal or interest, except for residential mortgage loans insured or guaranteed under applicable FHA and VA programs that are not placed in non-accrual status until they become 12 months or more past due, as they are insured loans. At that time, any accrued income is reversed. 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. Interest income is based on contractual yield on the Non-PCD loans.

 

Purchased Credit Deteriorated (PCD) Loans: Oriental has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Oriental considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality: loans that were 90 days or more past due; loans that had an internal loan grade of substandard or worse - substandard loans have a well-defined weakness that jeopardizes collection of the loan; loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and loans that had been previously modified in a troubled debt restructuring. As such, our PCD loans are recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition or implementation of the standard. An allowance for credit losses is determined using an undiscounted cashflow methodology.

 

15


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for these loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed, the pool is classified as non-accrual the accretion/amortization of the non-credit (discount) premium will cease. Changes to the allowance for credit losses after adoption are recorded through the provision expense.

 

Allowance for Credit Losses (“ACL”) – Loans: The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation of the ACL estimate in future periods in light of changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Oriental continues to monitor and modify the level of the ACL to ensure it is adequate.

 

Our methodology for estimating lifetime expected credit losses for our loan portfolios include the following key components:

 

Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, internal risk rating, credit characteristics such as credit scores or collateral values, and historical or expected credit loss patterns.

Credit losses for loans that do not share similar risk characteristics are estimated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. The lifetime losses for individually measured loans are estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

ACL reserves are estimated over the contractual term of the financial asset adjusted for expected prepayments. Expected extensions are generally not considered unless the option to extend the loan cannot be canceled unilaterally by Oriental. Loan modifications are also not considered, unless Oriental has a reasonable expectation that it will execute a troubled debt restructuring (“TDR”). In the case of unconditionally cancelable accounts, such as credit cards, reserves are based on the expected life of the balance as of the evaluation date (assuming no further charges) and do not include any undrawn commitments that are unconditionally cancelable.

The quantitative model utilizes a discounted cash flow (“DCF”) or undiscounted cash flow (“UDCF”) approach to estimate expected credit losses using probability of default (“PD”), loss given default (“LGD”), and exposure at default ("EAD”). DCF method is used for most of the Non-PCD portfolio using the amortization cost, and UDCF method for the PCD portfolio using the unpaid principal balance.

An economic forecast period based on the relation of losses with key economic variables for each portfolio segment; Oriental has elected a 2-year reasonable and supportable forecast period, with an additional 1-year to mean straight-line reversion occurring within the credit loss models based on the economic inputs. The length of the reasonable and supportable forecast is evaluated at each reporting period and adjusted if deemed necessary.

Inclusion of qualitative adjustments to consider factors that have not been accounted. For example, factors that Oriental considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements, among others.

The estimate of credit losses includes expected recoveries of amounts previously charged off (i.e., negative allowance) as well as consideration of expected amounts to be written off. If a loan has been charged off, the expected cash flows on the loan are not limited by the current amortized cost balance. Instead, expected cash flows can be assumed up to the unpaid principal balance immediately prior to the charge-off.

The ACL excludes accrued interest since all our products are subject to a non-accrual and timely write-off policy, except for accrued interest receivable on loans that participated in the Covid-19 deferral programs with delinquency status in 30 to 89 days past due and is calculated by applying the corresponding loan projected loss factors to the accrued interest receivable balance.

16


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

In our loss forecasting framework, Oriental incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, real estate prices, gross domestic product levels, business and personal bankruptcies. As any one economic outlook is inherently uncertain, Oriental leverages multiple scenarios. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends.

 

The ACL for troubled debt restructurings (TDR) is measured based on the present value of projected future lifetime principal and interest cash flows discounted at the loan’s effective interest rate, or in cases where foreclosure is probable or the loan is collateral dependent, at the loan’s collateral value or its observable market price, if available. For purposes of computing the specific loss component of the allowance, larger impaired loans are evaluated individually, and smaller impaired loans are evaluated as a pool.

 

Oriental has identified the following portfolio segments, commercial loans, mortgage loans, consumer loans, and auto loans and leases, and measures the allowance for credit losses using the methods described below for each.

 

Commercial Loans – The segmentation of commercial loans was established by business line, collateral type, and size, delinquency or risk rating/classification to assess the loans based on common risk characteristics. The segmentation aligns with Oriental’s current credit policies, and procedures for these portfolios. The estimate of lifetime expected credit losses on commercial loans is forecasted using models that estimate credit losses over the loan’s contractual life at an individual loan level. The models use the contractual terms to forecast future principal cash flows while also considering expected prepayments, considering that all our lines of credit are unconditionally cancellable. The loss forecasting model determines the probabilities of transition to different credit risk ratings or default at each point over the life of the asset based on the borrower’s current credit risk rating and business segment. Assumptions of expected loss are conditioned to the economic outlook and the model considers key economic variables such as unemployment rate, gross national product (“GNP”) (P.R. projections), gross domestic product (U.S. projections) and retail sales (U.S. projections).

 

Loans that do not share risk characteristics are evaluated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate, as Oriental elected the collateral-dependent practical expedient. For loans evaluated individually that are not collateral dependent, a discounted cash flow method is used to determine the allowance for credit losses.

 

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.

 

Mortgage Loans – This segment includes traditional mortgages, non-traditional mortgages, mortgages in the loss mitigation program, residential performing TDRs and residential non-performing TDRs. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for mortgage loans, Oriental estimates the number of loans that will default over the life of the existing portfolio, after factoring in estimated prepayments, using quantitative modeling methodologies. The most significant attribute in estimating Oriental’s lifetime expected credit losses is the vintage. The estimates are based on Oriental’s historical experience with the loan portfolio, adjusted to reflect the economic outlook. The outlook on the housing price index and GNP are key factors that impact the frequency and severity of loss estimates. Oriental expects to collect the amortized cost basis of government insured residential loans due to the nature of the government guarantee, so the quantitative ACL is zero for these loans.

 

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. For loans that are more than 180 days past due, with the exception of Oriental’s fully insured portfolio, the outstanding balance of loans that is in excess of the estimated property value after adjusting for costs to sell is charged off. If the estimated property value decreases in periods subsequent to the initial charge-off, Oriental will record additional charge-offs.

17


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Consumer Loans – This portfolio consists of smaller retail loans such as unsecured personal loans, unsecured personal lines of credit, retail credit cards and overdrafts. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for consumer loans, Oriental estimates the number of loans that will default over the life of the existing portfolio, using quantitative modeling methodologies. The estimates are based on the Oriental’s historical experience with the loan portfolios, adjusted to reflect the economic outlook. The outlook on the GNP and unemployment rate are key factors that impact the frequency and severity of loss estimates. Credit cards are revolving lines of credit without a defined maturity date. Oriental elected to apply the remaining life methodology for the credit cards and revolving line segments. The remaining life methodology takes projected losses based on economic forecast and applies it to a pool of loans on a periodic basis, based on the remaining life expectation of that pool. Economic variables for the forecast are unemployment and personal bankruptcy. Future draws on the credit card lines are excluded from the estimated lifetime expected credit losses as they are unconditionally cancellable.

 

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.

 

Auto Loans and Leases - This portfolio consists of auto loans and leases. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for auto loans and leases, Oriental estimates the number of loans that will default over the life of the existing portfolio, after factoring in estimated prepayments, using quantitative modeling methodologies. The most significant attribute in estimating Oriental’s lifetime expected credit losses is the FICO score. The estimates are based on Oriental’s historical experience with the loan portfolio, adjusted to reflect the economic outlook. The outlook on the GNP and unemployment are key factors that impact the frequency and severity of loss estimates.

 

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.

 

Off-Balance Sheet Credit Exposures

 

In the ordinary course of business, Oriental enters into off-balance sheet instruments consisting of commitments to extend credit. 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.

 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: Oriental also estimates the lifetime expected credit losses related to unfunded lending commitments such as letters of credit, financial guarantees, unfunded banker’s acceptances and binding loan commitments. Reserves are estimated for the unfunded exposure using the same factors as the funded exposure and are reported as reserves for unfunded lending commitments.

 

Other Financial Assets with Zero Expected Credit Losses

For certain financial assets, zero expected credit losses will be recognized where the expectation of nonpayment of the amortized cost basis is zero, based on there being no history of loss and the nature of the receivables.

 

18


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Troubled Debt Restructurings

 

Oriental has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of Covid-19. The majority of Oriental’s Covid-19 related loan modifications have not been considered TDRs as

they represent short-term or other insignificant modifications, whether under Oriental’s regular loan modification assessments or the Inter Agency Statement guidance; or Oriental has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under section 4013 of the CARES Act. To the extent that certain modifications do not meet any of the above criteria, Oriental accounts for them as TDRs. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. These loans are not considered past due until after the deferral period is over and scheduled payments resume. Accrued interest on these Covid-19 modified loans is due when the deferral period ends. The credit quality of these loans will be re-evaluated after the deferral period ends. Nonaccrual loans are generally loans placed on a nonaccrual basis when they become 90 days past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan. Oriental's policy is to write-off all accrued interest on loans when they are placed on nonaccrual status. Interest income will continue to be recognized over the contractual life of the loan. For more information on Oriental's TDR accounting, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements of Oriental’s 2019 Annual Report on Form 10-K.

 

Cloud computing arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance that is intended to reduce potential diversity in practice in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are service contracts. The updated guidance aligns the requirements for capitalizing implementation costs for these arrangements 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. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on Oriental’s consolidated financial statements.

 

Fair value measurements

In August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance eliminates, adds and modifies certain disclosure requirements related to fair value measurements. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company’s consolidated financial statements.

 

Goodwill

In January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the updated guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company’s consolidated financial statements.

 

 

NOTE 2 BUSINESS COMBINATIONS

 

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.

19


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

The assets acquired and liabilities assumed as of December 31, 2019 were presented at their fair value. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The fair values initially assigned to the assets acquired and liabilities assumed were 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 became available. During the nine-month period ended September 30, 2020, Oriental recorded remeasurement adjustments to the preliminary estimated fair values of certain accrued interest receivables that have not been received, the deferred tax asset and accounts receivables to reflect new information obtained during the measurement period (as defined by ASC Topic 805), about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. As detailed in the table below, the adjustment occurred in accrued interest receivable, deferred tax asset, and other assets acquired. The adjustment resulted from the fair value determination of certain accrued interest receivable of loans accounted for under ASC 310-30 and from the receipt of funds from BNS for certain intercompany transactions.

 

December 31, 2019

 

Measurement

 

Fair Value

 

 

 

 

Fair Value

 

 

 

 

Period

 

as

 

Book Value

 

Adjustments, net

 

Fair Value

 

Adjustments

 

Remeasured

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

492,512

 

$

0

 

$

492,512

 

$

0

 

$

492,512

Investments

 

576,319

 

 

(102)

 

 

576,217

 

 

0

 

 

576,217

Loans

 

2,237,337

 

 

(21,134)

 

 

2,216,203

 

 

0

 

 

2,216,203

Accrued interest receivable

 

7,722

 

 

(2,952)

 

 

4,770

 

 

5,540

 

 

10,310

Foreclosed real estate

 

8,636

 

 

(352)

 

 

8,284

 

 

0

 

 

8,284

Deferred tax asset, net

 

37,606

 

 

22,335

 

 

59,941

 

 

1,386

 

 

61,327

Premises and equipment

 

10,866

 

 

(1,068)

 

 

9,798

 

 

0

 

 

9,798

Servicing asset

 

40,258

 

 

206

 

 

40,464

 

 

0

 

 

40,464

Core deposit intangible

 

0

 

 

41,507

 

 

41,507

 

 

0

 

 

41,507

Customer relationship intangible

 

0

 

 

12,693

 

 

12,693

 

 

0

 

 

12,693

Other intangible

 

0

 

 

567

 

 

567

 

 

0

 

 

567

Operating lease right-of-use assets

 

15,452

 

 

4,011

 

 

19,463

 

 

0

 

 

19,463

Other assets

 

86,016

 

 

(6,507)

 

 

79,509

 

 

410

 

 

79,919

Total identifiable assets acquired

 

3,512,724

 

 

49,204

 

 

3,561,928

 

 

7,336

 

 

3,569,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

3,028,066

 

 

(2,607)

 

 

3,025,459

 

 

0

 

 

3,025,459

Operating lease liability

 

16,317

 

 

2,091

 

 

18,408

 

 

0

 

 

18,408

Accrued expenses and other liabilities

 

87,309

 

 

0

 

 

87,309

 

 

0

 

 

87,309

Total liabilities assumed

 

3,131,692

 

 

(516)

 

 

3,131,176

 

 

0

 

 

3,131,176

Total identifiable net assets

 

 

 

 

 

 

$

430,752

 

$

7,336

 

$

438,088

Bargain purchase gain

 

 

 

 

 

 

 

315

 

 

7,336

 

 

7,651

Total consideration

 

 

 

 

 

 

$

430,437

 

$

0

 

$

430,437

20


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Merger and Restructuring Charges

 

Merger and restructuring charges are recorded in the consolidated statement of operations and include incremental costs to integrate the operations of Oriental and its most recent acquisition. 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.

The following table presents severance and employee charges, systems integrations charges, and other merger and restructuring charges, related to the Scotiabank PR & USVI Acquisition, for the quarter and nine-month period ended September 30, 2020:

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2020

 

(In thousands)

 

(In thousands)

Severance and employee-related charges

$

0

 

$

33

Systems integrations and related charges

 

2,282

 

 

5,424

Other

 

399

 

 

534

Total merger and restructuring charges

$

2,681

 

$

5,991

Restructuring Reserve

Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the merger and restructuring charges table.

The following table presents the changes in restructuring reserves for the quarter and nine-month period ended September 30, 2020:

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2020

 

(In thousands)

 

(In thousands)

Balance at the beginning of the period

$

16,388

 

$

17,491

Merger and restructuring charges

 

2,681

 

 

5,991

Cash payments

 

(7,164)

 

 

(11,577)

Balance at the end of the period

$

11,905

 

$

11,905

Payments under merger and restructuring reserves 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.

21


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 3 – RESTRICTED CASH

 

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

 

 

September 30,

 

December 31,

 

2020

 

2019

 

(In thousands)

Cash pledged as collateral to other financial institutions to secure:

 

 

 

 

 

Regulatory requirements

$

0

 

$

400

Obligations under agreement of loans sold with recourse

 

1,050

 

 

1,050

 

$

1,050

 

$

1,450

At September 30, 2020 and December 31, 2019, 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. As of September 30, 2020, the entity held a $325 thousand in short term high liquidity securities. These instruments cannot be withdrawn or transferred 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. This certificate matured and was not renewed.

 

Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At both, September 30, 2020 and December 31, 2019, Oriental delivered as collateral cash amounting to approximately $1.1 million.

 

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered September 30, 2020 was $416.1 million (December 31, 2019 - $289.3 million). At September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, money market instruments included as part of cash and cash equivalents amounted to $14.6 million and $6.8 million, respectively.

 

22


OFG BANCORP

NOTES TO UNAUDITED 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 September 30, 2020 and December 31, 2019 were as follows:

 

 

September 30, 2020

 

 

 

Gross

 

Gross

 

 

 

Weighted

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Average

 

Cost

 

Gains

 

Losses

 

Value

 

Yield

 

(In thousands)

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA and FHLMC certificates

$

135,067

 

$

4,897

 

$

0

 

$

139,964

 

1.96%

GNMA certificates

 

141,412

 

 

4,480

 

 

0

 

 

145,892

 

2.29%

CMOs issued by US government-sponsored agencies

 

42,816

 

 

1,048

 

 

0

 

 

43,864

 

1.97%

Total mortgage-backed securities

 

319,295

 

 

10,425

 

 

0

 

 

329,720

 

2.11%

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

 

91,109

 

 

422

 

 

0

 

 

91,531

 

1.61%

Obligations of US government-sponsored agencies

 

1,688

 

 

26

 

 

0

 

 

1,714

 

1.39%

Other debt securities

 

808

 

 

42

 

 

0

 

 

850

 

2.99%

Total investment securities

 

93,605

 

 

490

 

 

0

 

 

94,095

 

1.62%

Total securities available for sale

$

412,900

 

$

10,915

 

$

0

 

$

423,815

 

2.00%

 

December 31, 2019

 

 

 

Gross

 

Gross

 

 

 

Weighted

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Average

 

Cost

 

Gains

 

Losses

 

Value

 

Yield

 

(In thousands)

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA and FHLMC certificates

$

403,227

 

$

846

 

$

1,417

 

$

402,656

 

2.00%

GNMA certificates

 

215,755

 

 

718

 

 

4

 

 

216,469

 

2.33%

CMOs issued by US government-sponsored agencies

 

55,235

 

 

16

 

 

490

 

 

54,761

 

1.97%

Total mortgage-backed securities

 

674,217

 

 

1,580

 

 

1,911

 

 

673,886

 

2.11%

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

 

397,183

 

 

0

 

 

0

 

 

397,183

 

1.60%

Obligations of US government-sponsored agencies

 

1,967

 

 

0

 

 

6

 

 

1,961

 

1.38%

Other debt securities

 

1,108

 

 

31

 

 

0

 

 

1,139

 

3.00%

Total investment securities

 

400,258

 

 

31

 

 

6

 

 

400,283

 

1.60%

Total securities available-for-sale

$

1,074,475

 

$

1,611

 

$

1,917

 

$

1,074,169

 

1.92%

23


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The amortized cost and fair value of Oriental’s investment securities at September 30, 2020, 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.

 

 

September 30, 2020

 

Available-for-sale

 

Amortized Cost

 

Fair Value

 

(In thousands)

Mortgage-backed securities

 

 

 

 

 

Due less than one year

 

 

 

 

 

FNMA and FHLMC certificates

$

597

 

$

624

Total due in less than one year

 

597

 

 

624

Due from 1 to 5 years

 

 

 

 

 

GNMA certificates

 

546

 

 

550

Total due from 1 to 5 years

 

546

 

 

550

Due after 5 to 10 years

 

 

 

 

 

CMOs issued by US government-sponsored agencies

$

35,553

 

$

36,442

FNMA and FHLMC certificates

 

103,975

 

$

107,933

GNMA certificates

 

64,979

 

$

66,388

Total due after 5 to 10 years

 

204,507

 

 

210,763

Due after 10 years

 

 

 

 

 

FNMA and FHLMC certificates

$

30,495

 

$

31,407

GNMA certificates

 

75,888

 

$

78,954

CMOs issued by US government-sponsored agencies

 

7,262

 

$

7,422

Total due after 10 years

 

113,645

 

 

117,783

Total mortgage-backed securities

 

319,295

 

 

329,720

Investment securities

 

 

 

 

 

Due less than one year

 

 

 

 

 

US Treasury securities

$

81,103

 

$

81,245

Other debt securities

 

100

 

$

100

Total due in less than one year

 

81,203

 

 

81,345

Due from 1 to 5 years

 

 

 

 

 

Obligations of US government-sponsored agencies

$

1,688

 

$

1,714

US Treasury securities

 

10,006

 

$

10,286

Total due from 1 to 5 years

 

11,694

 

 

12,000

Due from 5 to 10 years

 

 

 

 

 

Other debt securities

 

708

 

 

750

Total due after 5 to 10 years

 

708

 

 

750

Total investment securities

 

93,605

 

 

94,095

Total

$

412,900

 

$

423,815

24


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

During the nine-month period ended September 30, 2020, Oriental retained securitized GNMA pools totaling $46.2 million amortized cost, at a yield of 2.69% from its own originations, while during the nine-month period ended on September 30, 2019 that amount totaled $45.7 million amortized cost, at a yield of 3.42%.

 

During the nine-month period ended September 30, 2020, Oriental sold $316.3 million available-for-sale-mortgage-backed securities and recorded a net gain on sale of securities of $4.7 million. During the nine-month period ended September 30, 2019 Oriental sold $680.5 million available-for-sale mortgage-backed securities and recognized a gain in the sale of $8.3 million.

 

Nine-Month Period Ended September 30, 2020

 

 

 

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

$

229,571

 

$

227,213

 

$

2,358

 

$

0

GNMA certificates

 

91,413

 

 

89,043

 

 

2,370

 

 

0

Total

$

320,984

 

$

316,256

 

$

4,728

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Month Period Ended September 30, 2019

 

 

 

Book Value

 

 

 

 

Description

Sale Price

 

at Sale

 

Gross Gains

 

Gross Losses

 

(In thousands)

Sale of securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

FNMA and FHLMC certificates

$

451,081

 

$

447,305

 

$

3,776

 

$

0

GNMA certificates

 

229,385

 

 

224,887

 

 

4,498

 

 

0

Total

$

680,466

 

$

672,192

 

$

8,274

 

$

0

At September 30, 2020, Oriental did not have investment securities in unrealized loss position. Effective January 1, 2020, Oriental adopted the new accounting standard for credit losses that requires evaluation of available-for-sale debt securities for any expected losses with recognition of an allowance for credit losses, when applicable. For more information, see Note 1 – Significant Accounting Policies. At September 30, 2020, all securities held by Oriental are issued by U.S. government entities and agencies that have a zero-credit loss assumption.

25


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table show Oriental’s gross unrealized losses and fair value of investment securities available-for-sale at December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

December 31, 2019

 

12 months or more

 

Amortized

 

Unrealized

 

Fair

 

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

CMOs issued by US Government-sponsored agencies

$

35,417

 

$

387

 

$

35,030

FNMA and FHLMC certificates

 

259,099

 

 

1,415

 

 

257,684

Obligations of US Government and sponsored agencies

 

1,967

 

 

6

 

 

1,961

GNMA certificates

 

19

 

 

0

 

 

19

 

$

296,502

 

$

1,808

 

$

294,694

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Amortized

 

Unrealized

 

Fair

 

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

CMOs issued by US Government-sponsored agencies

 

11,503

 

 

103

 

 

11,400

FNMA and FHLMC certificates

 

4,919

 

 

2

 

 

4,917

GNMA certificates

 

3,549

 

 

4

 

 

3,545

US Treasury Securities

 

627

 

 

0

 

 

627

 

$

20,598

 

$

109

 

$

20,489

 

 

 

 

 

 

 

 

 

 

Total

 

Amortized

 

Unrealized

 

Fair

 

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

CMOs issued by US Government-sponsored agencies

 

46,920

 

 

490

 

 

46,430

FNMA and FHLMC certificates

 

264,018

 

 

1,417

 

 

262,601

Obligations of US government and sponsored agencies

 

1,967

 

 

6

 

 

1,961

GNMA certificates

 

3,568

 

 

4

 

 

3,564

US Treasury Securities

 

627

 

 

0

 

 

627

 

$

317,100

 

$

1,917

 

$

315,183

 

26


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

NOTE 5 - LOANS

 

Oriental’s loan portfolio is composed of four segments, commercial, mortgage, consumer, and auto. Loans are further segregated into classes which Oriental uses when assessing and monitoring the risk and performance of the portfolio.

 

The composition of the amortized cost basis of Oriental’s loan portfolio at September 30, 2020 was as follows:

 

 

 

September 30, 2020

 

 

Non-PCD

 

PCD

 

Total

 

 

(In thousands)

Commercial loans:

 

 

 

 

 

 

 

 

 

Commercial secured by real estate

 

$

810,755

 

$

248,653

 

$

1,059,408

Other commercial and industrial

 

 

636,610

 

 

103,902

 

 

740,512

Commercial Paycheck Protection Program (PPP Loans)

 

 

289,218

 

 

0

 

 

289,218

US Loan Program

 

 

337,657

 

 

0

 

 

337,657

 

 

 

2,074,240

 

 

352,555

 

 

2,426,795

Mortgage

 

 

847,671

 

 

1,504,914

 

 

2,352,585

Consumer

 

 

 

 

 

 

 

 

 

Personal loans

 

 

327,923

 

 

1,934

 

 

329,857

Credit lines

 

 

46,873

 

 

402

 

 

47,275

Credit cards

 

 

59,618

 

 

0

 

 

59,618

Overdraft

 

 

132

 

 

0

 

 

132

Auto

 

 

1,511,829

 

 

31,836

 

 

1,543,665

 

 

 

1,946,375

 

 

34,172

 

 

1,980,547

 

 

 

4,868,286

 

 

1,891,641

 

 

6,759,927

Allowance for credit losses

 

 

(156,409)

 

 

(78,904)

 

 

(235,313)

Total loans held for investment

 

 

4,711,877

 

 

1,812,737

 

 

6,524,614

Mortgage loans held for sale

 

 

54,526

 

 

0

 

 

54,526

Total loans, net

 

$

4,766,403

 

$

1,812,737

 

$

6,579,140

At September 30, 2020, and December 31, 2019, Oriental had a carrying balance of $121.9 million and $134.0 million, respectively, in 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. Loans granted to the Puerto Rico government amounting to $97.8 million and $129.9 million at September 30, 2020, and December 31, 2019, respectively, 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 in current status and one loan amounting to $24.1 million and $4.1 million, respectively, to a public corporation acquired in the Scotiabank PR & USVI Acquisition in non-accrual status with an allowance for credit losses of $20.0 million at September 30, 2020. 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, 0 allowance for credit losses was recorded at acquisition date. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

 

27


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The tables below present the aging of the amortized cost of loans held for investment at September 30, 2020 and December 31, 2019, by class of loans. Mortgage loans past due include $62.7 million and $75.2 million, respectively, of 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.

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial secured by real estate

$

2,987

 

$

749

 

$

23,984

 

$

27,720

 

$

783,035

 

$

810,755

 

$

0

Other commercial and industrial

 

983

 

 

432

 

 

6,460

 

 

7,875

 

 

917,953

 

 

925,828

 

 

0

US Loan Program

 

0

 

 

0

 

 

0

 

 

0

 

 

337,657

 

 

337,657

 

 

0

 

 

3,970

 

 

1,181

 

 

30,444

 

 

35,595

 

 

2,038,645

 

 

2,074,240

 

 

0

Mortgage

 

5,793

 

 

10,989

 

 

96,986

 

 

113,768

 

 

733,903

 

 

847,671

 

 

3,666

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal loans

 

4,984

 

 

4,209

 

 

2,237

 

 

11,430

 

 

316,493

 

 

327,923

 

 

0

Credit lines

 

999

 

 

196

 

 

1,249

 

 

2,444

 

 

44,429

 

 

46,873

 

 

0

Credit cards

 

1,104

 

 

509

 

 

1,561

 

 

3,174

 

 

56,444

 

 

59,618

 

 

0

Overdraft

 

31

 

 

0

 

 

0

 

 

31

 

 

101

 

 

132

 

 

0

Auto

 

53,782

 

 

34,130

 

 

21,823

 

 

109,735

 

 

1,402,094

 

 

1,511,829

 

 

0

 

 

60,900

 

 

39,044

 

 

26,870

 

 

126,814

 

 

1,819,561

 

 

1,946,375

 

 

0

Total loans

$

70,663

 

$

51,214

 

$

154,300

 

$

276,177

 

$

4,592,109

 

$

4,868,286

 

$

3,666

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, PCD loans are not included in the table above.

28


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial secured by real estate

$

994

 

$

946

 

$

17,495

 

$

19,435

 

$

847,271

 

$

866,706

 

$

0

Other commercial and industrial

 

7,584

 

 

371

 

 

2,716

 

 

10,671

 

 

712,855

 

 

723,526

 

 

0

US Loan Program

 

0

 

 

0

 

 

0

 

 

0

 

 

272,595

 

 

272,595

 

 

0

 

 

8,578

 

 

1,317

 

 

20,211

 

 

30,106

 

 

1,832,721

 

 

1,862,827

 

 

0

Mortgage

 

9,285

 

 

13,105

 

 

94,109

 

 

116,499

 

 

783,096

 

 

899,595

 

 

2,418

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal loans

 

4,978

 

 

2,123

 

 

1,579

 

 

8,680

 

 

358,477

 

 

367,157

 

 

0

Credit lines

 

533

 

 

20

 

 

221

 

 

774

 

 

51,840

 

 

52,614

 

 

0

Credit cards

 

1,438

 

 

417

 

 

896

 

 

2,751

 

 

72,451

 

 

75,202

 

 

0

Overdraft

 

51

 

 

0

 

 

0

 

 

51

 

 

165

 

 

216

 

 

0

Auto

 

72,336

 

 

31,412

 

 

14,270

 

 

118,018

 

 

1,350,864

 

 

1,468,882

 

 

0

 

 

79,336

 

 

33,972

 

 

16,966

 

 

130,274

 

 

1,833,797

 

 

1,964,071

 

 

0

Total loans

$

97,199

 

$

48,394

 

$

131,286

 

$

276,879

 

$

4,449,614

 

$

4,726,493

 

$

2,418

Before the CECL implementation, certain acquired loans were accounted for by Oriental in accordance with ASC 310-30.

 

The carrying amount corresponding to acquired loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at December 31, 2019 was as follows:

 

 

December 31, 2019

 

 

Scotiabank PR & USVI

 

 

BBVAPR

 

 

Eurobank

 

(In thousands)

Contractual required payments receivable:

$

2,147,249

 

$

1,086,367

 

$

117,107

Less: Non-accretable discount

 

294,424

 

 

340,466

 

 

4,285

Cash expected to be collected

 

1,852,825

 

 

745,901

 

 

112,822

Less: Accretable yield

 

458,885

 

 

214,886

 

 

34,441

Carrying amount, gross

 

1,393,940

 

 

531,015

 

 

78,381

Less: allowance for loan and lease losses

 

0

 

 

17,036

 

 

14,458

Carrying amount, net

$

1,393,940

 

$

513,979

 

$

63,923

 

 

 

 

 

 

 

 

 

29


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table describes the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the quarter and nine-month period ended September 30, 2019:

 

Quarter Ended September 30, 2019

 

Mortgage

 

Commercial

 

Auto

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

217,549

 

$

34,638

 

$

43

 

$

288

 

$

252,518

Accretion

 

(5,876)

 

 

(2,379)

 

 

(77)

 

 

(151)

 

 

(8,483)

Change in expected cash flows

 

0

 

 

3,995

 

 

5

 

 

151

 

 

4,151

Transfer from (to) non-accretable discount

 

(9,849)

 

 

(17,128)

 

 

57

 

 

(94)

 

 

(27,014)

Balance at end of period

$

201,824

 

$

19,126

 

$

28

 

$

194

 

$

221,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

292,258

 

$

10,904

 

$

24,083

 

$

18,810

 

$

346,055

Change in actual and expected losses

 

(21,356)

 

 

(3,913)

 

 

44

 

 

(118)

 

 

(25,343)

Transfer (to) from accretable yield

 

9,849

 

 

17,128

 

 

(57)

 

 

94

 

 

27,014

Balance at end of period

$

280,751

 

$

24,119

 

$

24,070

 

$

18,786

 

$

347,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Month Period Ended September 30, 2019

 

Mortgage

 

Commercial

 

Auto

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

232,199

 

$

36,508

 

$

243

 

$

560

 

$

269,510

Accretion

 

(18,342)

 

 

(7,523)

 

 

(432)

 

 

(639)

 

 

(26,936)

Change in expected cash flows

 

0

 

 

8,635

 

 

16

 

 

639

 

 

9,290

Transfer from (to) non-accretable discount

 

(12,033)

 

 

(18,494)

 

 

201

 

 

(366)

 

 

(30,692)

Balance at end of period

$

201,824

 

$

19,126

 

$

28

 

$

194

 

$

221,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

291,887

 

$

10,346

 

$

24,245

 

$

18,945

 

$

345,423

Change in actual and expected losses

 

(23,169)

 

 

(4,721)

 

 

26

 

 

(525)

 

 

(28,389)

Transfer (to) from accretable yield

 

12,033

 

 

18,494

 

 

(201)

 

 

366

 

 

30,692

Balance at end of period

$

280,751

 

$

24,119

 

$

24,070

 

$

18,786

 

$

347,726

30


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table describes the accretable yield and non-accretable discount activity of acquired Eurobank loans for the quarter and nine-month period ended September 30, 2019:

 

Quarter Ended September 30, 2019

 

Mortgage

 

Commercial

 

Leasing

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

36,538

 

$

1,856

 

 

0

 

$

0

 

$

38,394

Accretion

 

(1,218)

 

 

(1,075)

 

 

3

 

 

(89)

 

 

(2,379)

Change in expected cash flows

 

1,917

 

 

550

 

 

(93)

 

 

132

 

 

2,506

Transfer from (to) non-accretable discount

 

(2,542)

 

 

(438)

 

 

90

 

 

(43)

 

 

(2,933)

Balance at end of period

$

34,695

 

$

893

 

$

0

 

$

0

 

$

35,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

1,681

 

$

0

 

$

0

 

$

118

 

$

1,799

Change in actual and expected losses

 

(2,597)

 

 

(438)

 

 

90

 

 

(73)

 

 

(3,018)

Transfer (to) from accretable yield

 

2,542

 

 

438

 

 

(90)

 

 

43

 

 

2,933

Balance at end of period

$

1,626

 

$

0

 

$

0

 

$

88

 

$

1,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Month Period Ended September 30, 2019

 

Mortgage

 

Commercial

 

Leasing

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

38,389

 

$

3,310

 

 

0

 

$

0

 

$

41,699

Accretion

 

(3,849)

 

 

(3,439)

 

 

(12)

 

 

(152)

 

 

(7,452)

Change in expected cash flows

 

1,524

 

 

1,416

 

 

(134)

 

 

250

 

 

3,056

Transfer from (to) non-accretable discount

 

(1,369)

 

 

(394)

 

 

146

 

 

(98)

 

 

(1,715)

Balance at end of period

$

34,695

 

$

893

 

$

0

 

$

0

 

$

35,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

2,826

 

$

0

 

$

0

 

$

133

 

$

2,959

Change in actual and expected losses

 

(2,569)

 

 

(394)

 

 

146

 

 

(143)

 

 

(2,960)

Transfer (to) from accretable yield

 

1,369

 

 

394

 

 

(146)

 

 

98

 

 

1,715

Balance at end of period

$

1,626

 

$

0

 

$

0

 

$

88

 

$

1,714

31


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Non-accrual Loans

 

The following table presents the amortized cost basis of loans on nonaccrual status as of September 30, 2020:

 

 

 

 

 

 

 

September 30, 2020

 

Nonaccrual with

 

Nonaccrual with no

 

Allowance

 

Allowance

 

for Credit Loss

 

for Credit Loss

 

(In thousands)

Non-PCD:

 

 

 

 

 

Commercial

 

 

 

 

 

Commercial secured by real estate

$

9,902

 

$

28,015

Other commercial and industrial

 

3,806

 

 

3,219

 

 

13,708

 

 

31,234

Mortgage

 

23,050

 

 

12,883

Consumer

 

 

 

 

 

Personal loans

 

1,826

 

 

565

Personal lines of credit

 

1,253

 

 

0

Credit cards

 

1,562

 

 

0

Auto and leasing

 

22,583

 

 

0

 

 

27,224

 

 

565

Total non-accrual loans

$

63,982

 

$

44,682

 

 

 

 

 

 

PCD:

 

 

 

 

 

Commercial

 

 

 

 

 

Commercial secured by real estate

$

14,566

 

$

3,068

Other commercial and industrial

 

60,946

 

 

1,051

 

 

75,512

 

 

4,119

Mortgage

 

1,003

 

 

0

Consumer

 

 

 

 

 

Personal loans

 

4

 

 

0

 

 

4

 

 

0

Total non-accrual loans

$

76,519

 

$

4,119

 

$

140,501

 

$

48,801

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for these loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level.

 

 

32


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the recorded investment in loans in non-accrual status by class of loans as of December 31, 2019:

 

December 31,

 

2019

 

(In thousands)

Commercial

 

 

Commercial secured by real estate

$

32,720

Other commercial and industrial

 

9,886

 

 

42,606

Mortgage

 

18,735

Consumer

 

 

Personal loans

 

4,164

Personal lines of credit

 

227

Credit cards

 

896

Auto and leasing

 

14,295

 

 

19,582

Total non-accrual loans

$

80,923

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, those loans are included as non-performing loans but excluded from non-accrual loans.

 

At September 30, 2020 and December 31, 2019, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $98.7 million and $103.7 million, respectively, as they were performing under their new terms.

33


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Modifications

 

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters and nine-month periods ended September 30, 2020 and 2019.

 

 

Quarter Ended September 30, 2020

 

Number of contracts

 

Pre-Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage

22

 

$

2,438

 

4.98%

 

286

 

$

2,268

 

4.36%

 

285

Commercial

1

 

 

150

 

5.50%

 

12

 

 

150

 

8.00%

 

36

Consumer

2

 

 

32

 

13.68%

 

68

 

 

32

 

10.61%

 

68

Auto

29

 

 

187

 

10.63%

 

76

 

 

187

 

10.87%

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Month Period Ended September 30, 2020

 

Number of contracts

 

Pre-Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage

51

 

$

5,982

 

5.04%

 

327

 

$

5,736

 

4.34%

 

329

Commercial

3

 

 

581

 

6.71%

 

57

 

 

581

 

7.03%

 

135

Consumer

20

 

 

284

 

13.11%

 

67

 

 

289

 

10.63%

 

78

Auto

31

 

 

217

 

10.88%

 

74

 

 

219

 

11.02%

 

71

34


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended September 30, 2019

 

Number of contracts

 

Pre-Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage

21

 

$

2,446

 

5.97%

 

358

 

$

2,307

 

5.25%

 

345

Commercial

1

 

 

81

 

8.50%

 

60

 

 

81

 

8.50%

 

95

Consumer

124

 

 

1,818

 

16.50%

 

65

 

 

1,776

 

11.68%

 

75

Auto

8

 

 

112

 

6.96%

 

71

 

 

112

 

8.60%

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Month Period Ended September 30, 2019

 

Number of contracts

 

Pre-Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage

109

 

$

13,940

 

5.91%

 

383

 

$

12,893

 

5.14%

 

346

Commercial

3

 

 

1,245

 

7.12%

 

55

 

 

1,245

 

5.96%

 

86

Consumer

265

 

 

3,833

 

15.92%

 

66

 

 

3,825

 

11.69%

 

75

Auto

21

 

 

305

 

7.35%

 

70

 

 

313

 

8.97%

 

45

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, PCD loans are not included in the table above.

 

 

35


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents troubled-debt restructurings for which there was a payment default during the twelve-month periods ended September 30, 2020 and 2019:

 

 

Twelve-month Period Ended September 30,

 

2020

 

 

2019

 

Number of Contracts

 

Recorded Investment

 

 

Number of Contracts

 

Recorded Investment

 

(Dollars in thousands)

Mortgage

17

 

$

2,394

 

 

32

 

$

4,065

Commercial

1

 

$

84

 

 

2

 

$

350

Consumer

50

 

$

627

 

 

61

 

$

710

Auto

0

 

$

0

 

 

3

 

$

51

Oriental offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were 0 commitments to lend additional funds to the borrower during the quarters and nine-month periods ended September 30, 2020 and 2019.

 

TDRs disclosed above were not related to COVID-19 modifications. As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. Oriental’s loan deferrals outstanding balances at September 30, 2020 of approximately $135 million resulting from the COVID-19 pandemic were not classified as a TDR.

Collateral-dependent Loans

 

The table below present the amortized cost of collateral-dependent loans held for investment at September 30, 2020, by class of loans.

 

September 30, 2020

 

Real Estate

 

(In thousands)

Commercial loans:

 

 

Commercial secured by real estate

$

29,731

Other commercial and industrial

 

3,069

Total loans

$

32,800

PCD loans, except for single pooled loans, are not included in the table above as their unit of account is the loan pool.

36


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Credit Quality Indicators

 

Oriental categorizes its loans 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.

 

37


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of September 30, 2020 and based on the most recent analysis performed, the risk category of loans subject to risk rating by class of loans is as follows.

 

 

Term Loans

 

Revolving

 

 

 

 

Amortized Cost Basis by Origination Year

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Cost Basis

 

Total

 

(In thousands)

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

31,615

 

$

125,253

 

$

116,703

 

$

87,845

 

$

48,245

 

$

227,034

 

$

56,413

 

$

693,108

Special Mention

 

10,213

 

 

3,048

 

 

4,762

 

 

16,850

 

 

8,621

 

 

20,599

 

 

6,760

 

 

70,853

Substandard

 

188

 

 

398

 

 

874

 

 

8,738

 

 

628

 

 

28,478

 

 

7,411

 

 

46,715

Doubtful

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

30

 

 

49

 

 

79

Loss

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

Total commercial secured by real estate

 

42,016

 

 

128,699

 

 

122,339

 

 

113,433

 

 

57,494

 

 

276,141

 

 

70,633

 

 

810,755

Other commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

345,220

 

 

87,578

 

 

97,500

 

 

15,175

 

 

8,903

 

 

15,342

 

 

306,602

 

 

876,320

Special Mention

 

301

 

 

8,135

 

 

0

 

 

0

 

 

4

 

 

5,470

 

 

27,984

 

 

41,894

Substandard

 

0

 

 

796

 

 

168

 

 

194

 

 

2,912

 

 

91

 

 

3,385

 

 

7,546

Doubtful

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

68

 

 

68

Loss

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

Total other commercial and industrial:

 

345,521

 

 

96,509

 

 

97,668

 

 

15,369

 

 

11,819

 

 

20,903

 

 

338,039

 

 

925,828

US Loan Program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

57,673

 

 

64,563

 

 

79,209

 

 

7,131

 

 

0

 

 

0

 

 

75,345

 

 

283,921

Special Mention

 

63

 

 

1,501

 

 

43,101

 

 

0

 

 

0

 

 

0

 

 

1,250

 

 

45,915

Substandard

 

0

 

 

0

 

 

7,821

 

 

0

 

 

0

 

 

0

 

 

0

 

 

7,821

Doubtful

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

Loss

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

Total US loan program:

 

57,736

 

 

66,064

 

 

130,131

 

 

7,131

 

 

0

 

 

0

 

 

76,595

 

 

337,657

Total commercial loans

$

445,273

 

$

291,272

 

$

350,138

 

$

135,933

 

$

69,313

 

$

297,044

 

$

485,267

 

$

2,074,240

 

At September 30, 2020, the balance of revolving loans converted to term loans was $25.2 million.

 

Oriental considers the performance of the loan portfolio and its impact on the allowance for credit losses. For mortgage and consumer loan classes, Oriental also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in mortgage and consumer loans based on payment activity:

38


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Loans

 

 

 

 

Term Loans

 

Revolving

 

Converted to

 

 

 

 

Amortized Cost Basis by Origination Year

 

Loans

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Amortized

 

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Cost Basis

 

Cost Basis

 

Total

 

(In thousands)

Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

4,170

 

$

21,330

 

$

28,735

 

$

34,413

 

$

40,319

 

$

678,226

 

$

0

 

$

0

 

$

807,193

Nonperforming

 

0

 

 

303

 

 

39

 

 

626

 

 

945

 

 

38,565

 

 

0

 

 

0

 

 

40,478

Total mortgage loans:

 

4,170

 

 

21,633

 

 

28,774

 

 

35,039

 

 

41,264

 

 

716,791

 

 

0

 

 

0

 

 

847,671

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

69,033

 

 

130,325

 

 

66,447

 

 

33,686

 

 

16,673

 

 

9,367

 

 

0

 

 

0

 

 

325,531

Nonperforming

 

82

 

 

543

 

 

664

 

 

404

 

 

326

 

 

373

 

 

0

 

 

0

 

 

2,392

Total personal loans

 

69,115

 

 

130,868

 

 

67,111

 

 

34,090

 

 

16,999

 

 

9,740

 

 

0

 

 

0

 

 

327,923

Credit lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

45,620

 

 

0

 

 

45,620

Nonperforming

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

1,253

 

 

0

 

 

1,253

Total credit lines

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

46,873

 

 

0

 

 

46,873

Credit cards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

58,056

 

 

0

 

 

58,056

Nonperforming

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

1,562

 

 

0

 

 

1,562

Total credit cards

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

59,618

 

 

0

 

 

59,618

Overdrafts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

132

 

 

0

 

 

132

Nonperforming

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

Total overdrafts

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

132

 

 

0

 

 

132

Total consumer loans

 

69,115

 

 

130,868

 

 

67,111

 

 

34,090

 

 

16,999

 

 

9,740

 

 

106,623

 

 

0

 

 

434,546

Total mortgage and consumer loans

$

73,285

 

$

152,501

 

$

95,885

 

$

69,129

 

$

58,263

 

$

726,531

 

$

106,623

 

$

0

 

$

1,282,217

39


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Oriental evaluates credit quality for auto loans and leases based on FICO score. The following table presents the amortized cost in auto loans and leases based on their most recent FICO score:

 

 

Term Loans

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Total

 

(In thousands)

Auto:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FICO score:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-660

 

81,738

 

 

123,802

 

 

105,596

 

 

62,980

 

 

34,460

 

 

28,443

 

 

437,019

661-699

 

54,684

 

 

77,710

 

 

49,632

 

 

25,131

 

 

14,147

 

 

12,029

 

 

233,333

700+

 

126,267

 

 

222,082

 

 

176,364

 

 

93,445

 

 

52,035

 

 

40,791

 

 

710,984

No FICO

 

13,656

 

 

43,322

 

 

34,291

 

 

18,861

 

 

10,907

 

 

9,456

 

 

130,493

Total auto:

$

276,345

 

$

466,916

 

$

365,883

 

$

200,417

 

$

111,549

 

$

90,719

 

$

1,511,829

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, PCD loans are not included in the table above.

 

As of December 31, 2019, and based on the most recent analysis performed, the loan grading of gross originated loans and acquired loans accounted for under ASC 310-20 subject to loan grade by class of loans was as follows:

 

 

December 31, 2019

 

Loan Grades

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Outstanding

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

(In thousands)

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial secured by real estate

$

866,706

 

$

762,443

 

$

55,870

 

$

48,357

 

$

36

 

$

0

Other commercial and industrial

 

723,526

 

 

706,831

 

 

6,634

 

 

9,960

 

 

101

 

 

0

US Loan Program

 

272,595

 

 

262,745

 

 

9,850

 

 

0

 

 

0

 

 

0

Total Commercial

$

1,862,827

 

$

1,732,019

 

$

72,354

 

$

58,317

 

$

137

 

$

0

 

December 31, 2019

 

Loan Grades

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Outstanding

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

$

899,595

 

$

805,486

 

$

0

 

$

94,109

 

$

0

 

$

0

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal loans

 

367,157

 

 

365,579

 

 

0

 

 

1,578

 

 

0

 

 

0

Personal lines of credit

 

52,614

 

 

52,393

 

 

0

 

 

221

 

 

0

 

 

0

Credit cards

 

75,202

 

 

74,306

 

 

0

 

 

896

 

 

0

 

 

0

Overdrafts

 

216

 

 

165

 

 

0

 

 

51

 

 

0

 

 

0

Auto

 

1,468,882

 

 

1,454,612

 

 

0

 

 

14,270

 

 

0

 

 

0

Total consumer loans

 

1,964,071

 

 

1,947,055

 

 

0

 

 

17,016

 

 

0

 

 

0

Total retail loans

$

2,863,666

 

$

2,752,541

 

$

0

 

$

111,125

 

$

0

 

$

0

40


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

 

On January 1, 2020, Oriental adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in Oriental’s relevant financial assets. Upon adoption of the new accounting standard, Oriental recorded a $89.7 million increase in the allowance for credit losses on January 1, 2020. For Non-PCD loans, which represents 70% of the total loan portfolio, a $39.2 million allowance was recorded. For PCD loans, which represents 30% of the total loan portfolio, a $50.5 million adjustment was made through the allowance and loan balances with no impact in capital.

 

The allowance for credit losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. Also included in the ACL are qualitative reserves to cover losses that are expected but, in Oriental's assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, Oriental incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends. For more information on Oriental's credit loss accounting policies, including the allowance for credit losses, see Note 1 – Summary of Significant Accounting Policies.

 

As of January 1, 2020, Oriental used a probability weighted scenario approach as it is expected that Puerto Rico’s economic forecast should be close to an average between the baseline, which represents the middle of all projections, and a moderate recession, which places itself in the downside alternative. During the quarter ended March 31, 2020, there was a significant change in the economic outlook impacting the allowance for credit losses, with key economic factors such as the unemployment rate and gross national product projected to deteriorate sharply driven by the impact of COVID-19. In response to these changes, Oriental reassessed the selection and probability weightings as well as analyzed various scenarios with immediate deterioration in economic variables followed by different recovery assumptions as part of the process for setting the allowance for credit loss reserve. Based on these analyses, Oriental is now effectively fully weighted to a moderate recessionary economic environment within our forecast period. In addition, the allowance for credit losses at September 30, 2020 continues to include qualitative reserves for certain segments that Oriental views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries. As a result of these developments, Oriental increased the provision for credit losses in the nine-month period ended September 30, 2020 by $39.1 million. There are still many unknowns including the duration of the impact of COVID-19 on the economy and the results of the government fiscal and monetary actions along with recently implemented payment deferral programs.

 

Loans acquired in the Scotiabank PR & USVI Acquisition 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.

 

 

41


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the activity in our allowance for credit losses by segment for the periods indicated:

 

 

Quarter Ended September 30, 2020

 

Commercial

 

Mortgage

 

Consumer

 

Auto

 

Total

 

(In thousands)

Non-PCD:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

43,011

 

$

19,973

 

$

31,954

 

$

56,569

 

$

151,507

Provision for credit losses

 

(1,771)

 

 

(564)

 

 

(378)

 

 

16,071

 

 

13,358

Charge-offs

 

(298)

 

 

(56)

 

 

(5,114)

 

 

(10,123)

 

 

(15,591)

Recoveries

 

253

 

 

269

 

 

663

 

 

5,950

 

 

7,135

Balance at end of period

$

41,195

 

$

19,622

 

$

27,125

 

$

68,467

 

$

156,409

PCD:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

48,913

 

$

30,920

 

$

169

 

$

1,192

 

$

81,194

Provision for credit losses

 

(1,262)

 

 

1,077

 

 

0

 

 

9

 

 

(176)

Charge-offs

 

(293)

 

 

(1,677)

 

 

(60)

 

 

(474)

 

 

(2,504)

Recoveries

 

91

 

 

89

 

 

(1)

 

 

211

 

 

390

Balance at end of period

$

47,449

 

$

30,409

 

$

108

 

$

938

 

$

78,904

Total allowance for credit losses at end of period

$

88,644

 

$

50,031

 

$

27,233

 

$

69,405

 

$

235,313

 

Nine-Month Period Ended September 30, 2020

 

Commercial

 

Mortgage

 

Consumer

 

Auto

 

Total

 

(In thousands)

Non-PCD:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

25,993

 

$

8,727

 

$

18,446

 

$

31,878

 

$

85,044

Impact of ASC 326 adoption

 

3,562

 

 

10,980

 

 

8,418

 

 

16,238

 

 

39,198

Provision for credit losses

 

13,799

 

 

47

 

 

13,827

 

 

43,261

 

 

70,934

Charge-offs

 

(4,566)

 

 

(659)

 

 

(15,316)

 

 

(36,476)

 

 

(57,017)

Recoveries

 

2,407

 

 

527

 

 

1,750

 

 

13,566

 

 

18,250

Balance at end of period

$

41,195

 

$

19,622

 

$

27,125

 

$

68,467

 

$

156,409

PCD:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

8,893

 

$

21,655

 

$

0

 

$

947

 

$

31,495

Impact of ASC 326 adoption

 

42,143

 

 

7,830

 

 

181

 

 

368

 

 

50,522

Provision for credit losses

 

(1,303)

 

 

9,131

 

 

356

 

 

289

 

 

8,473

Charge-offs

 

(3,036)

 

 

(8,998)

 

 

(521)

 

 

(1,449)

 

 

(14,004)

Recoveries

 

752

 

 

791

 

 

92

 

 

783

 

 

2,418

Balance at end of period

$

47,449

 

$

30,409

 

$

108

 

$

938

 

$

78,904

Total allowance for credit losses at end of period

$

88,644

 

$

50,031

 

$

27,233

 

$

69,405

 

$

235,313

42


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended September 30, 2019

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Total

 

(In thousands)

Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

15,361

 

$

29,265

 

$

17,448

 

$

29,563

 

$

91,637

Provision (recapture) for credit losses

 

8,836

 

 

1,324

 

 

3,181

 

 

10,087

 

 

23,428

Charge-offs

 

(16,299)

 

 

(8,421)

 

 

(5,316)

 

 

(12,383)

 

 

(42,419)

Recoveries

 

493

 

 

175

 

 

1,463

 

 

5,802

 

 

7,933

Balance at end of period

$

8,391

 

$

22,343

 

$

16,776

 

$

33,069

 

$

80,579

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

42,421

 

$

25,448

 

$

0

 

$

3,136

 

$

71,005

Provision (recapture) for credit losses

 

8,906

 

 

11,832

 

 

0

 

 

(396)

 

 

20,342

Allowance de-recognition

 

(17,060)

 

 

(72)

 

 

0

 

 

(451)

 

 

(17,583)

Balance at end of period

$

34,267

 

$

37,208

 

$

0

 

$

2,289

 

$

73,764

Total allowance for loan and lease losses at end of period

$

42,658

 

$

59,551

 

$

16,776

 

$

35,358

 

$

154,343

 

 

Nine-Month Period Ended September 30, 2019

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Total

 

(In thousands)

Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

19,783

 

$

30,348

 

$

17,476

 

$

29,643

 

$

97,250

Provision (recapture) for credit losses

 

5,002

 

 

3,225

 

 

12,277

 

 

23,171

 

 

43,675

Charge-offs

 

(17,490)

 

 

(11,733)

 

 

(15,148)

 

 

(34,567)

 

 

(78,938)

Recoveries

 

1,096

 

 

503

 

 

2,171

 

 

14,822

 

 

18,592

Balance at end of period

$

8,391

 

$

22,343

 

$

16,776

 

$

33,069

 

$

80,579

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

30,607

 

$

30,226

 

$

4

 

$

6,144

 

$

66,981

Provision (recapture) for credit losses

 

21,330

 

 

11,429

 

 

0

 

 

(2,710)

 

 

30,049

Allowance de-recognition

 

(17,670)

 

 

(4,447)

 

 

(4)

 

 

(1,145)

 

 

(23,266)

Balance at end of period

$

34,267

 

$

37,208

 

$

0

 

$

2,289

 

$

73,764

Total allowance for loan and lease losses at end of period

$

42,658

 

$

59,551

 

$

16,776

 

$

35,358

 

$

154,343

43


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

December 31, 2019

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Total

 

(In thousands)

Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable

to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

6,874

 

$

8,217

 

$

0

 

$

0

 

$

15,091

Collectively evaluated for impairment

 

1,853

 

 

17,776

 

 

18,446

 

 

31,878

 

 

69,953

Total ending allowance balance

$

8,727

 

$

25,993

 

$

18,446

 

$

31,878

 

$

85,044

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

71,196

 

$

61,128

 

$

0

 

$

0

 

$

132,324

Collectively evaluated for impairment

 

506,220

 

 

1,608,507

 

 

382,432

 

 

1,277,867

 

 

3,775,026

Total ending loan balance

$

577,416

 

$

1,669,635

 

$

382,432

 

$

1,277,867

 

$

3,907,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 7 FORECLOSED REAL ESTATE

 

The following tables present the activity related to foreclosed real estate for the quarters and nine-month periods ended September 30, 2020 and 2019:

 

 

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

24,792

 

$

29,509

 

$

29,909

 

$

33,768

Decline in value

 

(740)

 

 

(1,093)

 

 

(1,763)

 

 

(4,416)

Additions

 

613

 

 

4,572

 

 

2,560

 

 

12,868

Sales

 

(5,209)

 

 

(6,036)

 

 

(11,250)

 

 

(15,268)

Balance at end of period

$

19,456

 

$

26,952

 

$

19,456

 

$

26,952

 

NOTE 8 - SERVICING ASSETS

 

Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate Oriental for its expected cost. On December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition, increasing its 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 impact of COVID-19 has been considered in the fair value for the quarter and nine-month period ended September 30, 2020.

44


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

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 September 30, 2020, the servicing asset amounted to $47.2 million ($50.8 million — December 31, 2019) related to mortgage servicing rights.

The following table presents the changes in servicing rights measured using the fair value method for the quarters and nine-month periods ended September 30, 2020 and 2019:

 

 

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

 

2020

 

2019

 

2020

 

2019

 

(In thousands)

Fair value at beginning of period

$

47,926

 

$

10,134

 

$

50,779

 

$

10,716

Servicing from mortgage securitizations or asset transfers

 

656

 

 

352

 

 

1,236

 

 

860

Changes due to payments on loans

 

(1,365)

 

 

(243)

 

 

(2,810)

 

 

(694)

Changes in fair value due to changes in valuation model inputs or assumptions

 

25

 

 

(118)

 

 

(1,963)

 

 

(757)

Fair value at end of period

$

47,242

 

$

10,125

 

$

47,242

 

$

10,125

 

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the nine-month periods ended September 30, 2020 and 2019:

 

 

Nine-Month Period Ended September 30,

 

2020

 

2019

Constant prepayment rate

5.02% - 25.8%

 

4.38% - 9.44%

Discount rate

10.00% - 15.50%

 

10.00% - 12.00%

The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key assumptions were as follows:

 

 

September 30, 2020