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Section 1: 10-Q (FORM 10Q)

UNITED STATES

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, 2019

 

or

 

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

       EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File 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:

 

 51,347,056 common shares ($1.00 par value per share) outstanding as of October 31, 2019


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

 

 

Unaudited Consolidated Statements of Financial Condition

1

 

Unaudited Consolidated Statements of Operations

3

 

Unaudited Consolidated Statements of Comprehensive Income

5

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

6

 

Unaudited Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

Note 1 – Organization, Consolidation and Basis of Presentation

9

 

 

Note 2 – Significant Events

12

 

 

Note 3 – Restricted Cash

15

 

 

Note 4 – Investment Securities

17

 

 

Note 5 – Loans  

22

 

 

Note 6 – Allowance for Loan and Lease Losses

50

 

 

Note 7 – Foreclosed Real Estate

60

 

 

Note 8 – Derivatives

61

 

 

Note 9 – Accrued Interest Receivable and Other Assets

62

 

 

Note 10 – Deposits and Related Interest

63

 

 

Note 11 – Borrowings and Related Interest

65

 

 

Note 12 – Offsetting of Financial Assets and Liabilities

67

 

 

Note 13 – Income Taxes

69

 

 

Note 14 – Regulatory Capital Requirements

70

 

 

Note 15 – Stockholders’ Equity

72

 

 

Note 16 – Accumulated Other Comprehensive Income

74

 

 

Note 17 – Earnings per Common Share

77

 

 

Note 18 – Guarantees

78

 

 

Note 19 – Commitments and Contingencies

79

 

 

Note 20 – Operating Leases

80

 

 

Note 21 – Fair Value of Financial Instruments

83

 

 

Note 22 – Banking and Financial Service Revenues

89

 

 

Note 23 – Business Segments

91

 

 

 

Item 2.

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

94

 

 

Critical Accounting Policies and Estimates  

94

 

 

Selected Financial Data

95

 

 

Financial Highlights of the Third Quarter of 2019

97

 

 

Analysis of Results of Operations  

101

 

 

Analysis of Financial Condition  

114

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

138

Item 4.

Controls and Procedures

142

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

143

Item 1A.

Risk Factors

143

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

144

Item 3.

Default upon Senior Securities

144

Item 4.

Mine Safety Disclosures

144

Item 5.

Other Information

144

Item 6.

Exhibits

145

Signatures

146

 

 

 

 

 


 

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;

·      the impact of property, credit and other losses in Puerto Rico as a result of hurricanes, earthquakes and other natural disasters;

·      the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical infrastructure, which suffered catastrophic damages caused by hurricane Maria;

·      the pace and magnitude of Puerto Rico’s economic recovery;

·      the fiscal and monetary policies of the federal government and its agencies;

·      changes in federal bank regulatory and supervisory policies, including required levels of capital;

·      the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico;

·      the performance of the stock and bond markets;

·      competition in the financial services industry; 

·      possible legislative, tax or regulatory changes

·      the receipt and timing of regulatory approvals required to consummate the acquisition of Scotiabank de Puerto Rico (“SBPR”) and certain branch assets and liabilities of The Bank of Nova Scotia (“BNS”) in Puerto Rico and its U.S. Virgin Islands operations (the “Scotiabank Transaction”); and

·      difficulties in integrating the operations expected to be acquired in the Scotiabank Transaction.

 

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; Oriental’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change Oriental’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this 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.

 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

 

  

 

September 30,

 

December 31,

 

 

2019

 

2018

 

 

(In thousands)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

    Cash and due from banks

 

$

953,802

 

$

442,103

    Money market investments

 

 

8,035

 

 

4,930

        Total cash and cash equivalents

 

 

961,837

 

 

447,033

Restricted cash

 

 

1,050

 

 

3,030

Investments:

 

 

 

 

 

 

    Trading securities, at fair value, with amortized cost of $182 (December 31, 2018 - $647)

 

 

41

 

 

360

    Investment securities available-for-sale, at fair value, with amortized cost of $520,960 (December 31, 2018 - $854,511)

 

 

519,095

 

 

841,857

    Investment securities held-to-maturity, at amortized cost, with fair value of $410,353 at December 31, 2018

 

 

-

 

 

424,740

    Federal Home Loan Bank (FHLB) stock, at cost

 

 

10,525

 

 

12,644

    Other investments

 

 

57

 

 

3

        Total investments

 

 

529,718

 

 

1,279,604

Loans:

 

 

 

 

 

 

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

 

 

35,546

 

 

10,368

    Loans held for investment, net of allowance for loan losses of $154,343 (December 31, 2018 - $164,231)

 

 

4,371,644

 

 

4,421,226

        Total loans

 

 

4,407,190

 

 

4,431,594

Other assets:

 

 

 

 

 

 

    Foreclosed real estate

 

 

26,952

 

 

33,768

    Accrued interest receivable

 

 

30,470

 

 

34,254

    Deferred tax asset, net

 

 

112,602

 

 

113,763

    Premises and equipment, net

 

 

69,754

 

 

68,892

    Customers' liability on acceptances

 

 

21,796

 

 

16,937

    Servicing assets

 

 

10,125

 

 

10,716

    Derivative assets

 

 

13

 

 

347

    Goodwill

 

 

86,069

 

 

86,069

    Operating lease right-of-use assets

 

 

19,318

 

 

-

    Other assets

 

 

56,611

 

 

57,345

                Total assets

 

$

6,333,505

 

$

6,583,352

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

  

1 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018 (CONTINUED)

 

  

 

September 30,

 

December 31,

 

 

2019

 

2018

 

 

(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

    Demand deposits

 

$

2,228,256

 

$

2,191,802

    Savings accounts

 

 

1,225,654

 

 

1,212,259

    Time deposits

 

 

1,424,148

 

 

1,504,054

        Total deposits

 

 

4,878,058

 

 

4,908,115

Borrowings:

 

 

 

 

 

 

    Securities sold under agreements to repurchase

 

 

190,261

 

 

455,508

    Advances from FHLB

 

 

79,052

 

 

77,620

    Subordinated capital notes

 

 

36,083

 

 

36,083

    Other borrowings

 

 

551

 

 

1,214

        Total borrowings

 

 

305,947

 

 

570,425

Other liabilities:

 

 

 

 

 

 

    Derivative liabilities

 

 

1,159

 

 

333

    Acceptances executed and outstanding

 

 

21,796

 

 

16,937

    Operating lease liabilities

 

 

21,081

 

 

-

    Accrued expenses and other liabilities

 

 

56,388

 

 

87,665

            Total liabilities

 

 

5,284,429

 

 

5,583,475

Commitments and contingencies (See Note 18)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

    Preferred stock; 10,000,000 shares authorized;

 

 

 

 

 

 

        1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000

           shares of Series D issued and outstanding

 

 

 

 

 

 

           (December 31, 2018 - 1,340,000 shares; 1,380,000 shares; and 960,000

           shares) $25 liquidation value

 

 

92,000

 

 

92,000

    Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares

        issued: 51,347,056 shares outstanding (December 31, 2018 - $59,885,234;

 

 

 

 

 

 

       51,293,924)

 

 

59,885

 

 

59,885

    Additional paid-in capital

 

 

620,948

 

 

619,381

    Legal surplus

 

 

95,783

 

 

90,167

    Retained earnings

 

 

285,854

 

 

253,040

    Treasury stock, at cost, 8,538,178 shares (December 31, 2018 - 8,591,310 shares)

 

 

(102,936)

 

 

(103,633)

     Accumulated other comprehensive loss, net of tax of $552 (December 31, 2018 - $1,677)

 

 

(2,458)

 

 

(10,963)

            Total stockholders’ equity

 

 

1,049,076

 

 

999,877

                Total liabilities and stockholders’ equity

 

 $  

6,333,505

 

 $  

6,583,352

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

2 


OFG BANCORP

UNADUTIED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

 

 

Quarter Ended September 30,

 

 

Nine-Month Period Ended September 30,

 

2019

 

2018

 

 

2019

 

2018

 

(In thousands, except per share data)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

        Loans

$

85,772

 

$

84,016

 

 

$

254,971

 

$

237,057

        Mortgage-backed securities

 

3,553

 

 

8,173

 

 

 

17,465

 

 

23,258

        Investment securities and other

 

4,330

 

 

1,948

 

 

 

10,184

 

 

4,998

                    Total interest income

 

93,655

 

 

94,137

 

 

 

282,620

 

 

265,313

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

        Deposits

 

10,554

 

 

8,605

 

 

 

29,594

 

 

23,554

        Securities sold under agreements to repurchase

 

1,342

 

 

2,242

 

 

 

6,234

 

 

5,159

        Advances from FHLB and other borrowings

 

550

 

 

517

 

 

 

1,671

 

 

1,339

        Subordinated capital notes

 

499

 

 

496

 

 

 

1,537

 

 

1,402

                    Total interest expense

 

12,945

 

 

11,860

 

 

 

39,036

 

 

31,454

Net interest income

 

80,710

 

 

82,277

 

 

 

243,584

 

 

233,859

Provision for loan losses, net

 

43,770

 

 

14,601

 

 

 

73,724

 

 

44,808

Net interest income after provision for loan and lease losses

 

36,940

 

 

67,676

 

 

 

169,860

 

 

189,051

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

        Banking service revenue

 

10,813

 

 

10,797

 

 

 

32,054

 

 

32,404

        Wealth management revenue

 

6,611

 

 

6,407

 

 

 

19,162

 

 

18,688

        Mortgage banking activities

 

1,118

 

 

1,242

 

 

 

2,953

 

 

3,987

                    Total banking and financial service revenues

 

18,542

 

 

18,446

 

 

 

54,169

 

 

55,079

 

 

 

 

 

 

 

 

 

 

 

 

 

            Sale of securities

 

3,498

 

 

-

 

 

 

8,274

 

 

-

            Early extinguishment of debt

 

-

 

 

-

 

 

 

(7)

 

 

-

        Other non-interest income

 

138

 

 

174

 

 

 

346

 

 

758

                    Total non-interest income, net

 

22,178

 

 

18,620

 

 

 

62,782

 

 

55,837

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018 (CONTINUED)

 

 

Quarter Ended September 30,

 

 

Nine-Month Period Ended September 30,

 

2019

 

2018

 

 

2019

 

2018

 

(In thousands, except per share data)

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

        Compensation and employee benefits

 

20,500

 

 

18,495

 

 

 

60,716

 

 

57,202

        Occupancy, equipment and infrastructure costs

 

7,307

 

 

8,388

 

 

 

22,564

 

 

25,322

        Electronic banking charges

 

5,505

 

 

5,586

 

 

 

15,698

 

 

15,968

        Professional and service fees

 

3,662

 

 

3,077

 

 

 

10,297

 

 

8,917

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

 

2,889

 

 

3,946

 

 

 

8,839

 

 

9,880

        Information technology expenses

 

2,247

 

 

2,056

 

 

 

6,953

 

 

6,064

        Taxes, other than payroll and income taxes

 

2,235

 

 

2,175

 

 

 

6,530

 

 

6,820

        Advertising, business promotion, and strategic initiatives

 

1,333

 

 

1,329

 

 

 

3,859

 

 

3,700

        Loan servicing and clearing expenses

 

1,194

 

 

1,251

 

 

 

3,562

 

 

3,639

        Merger and restructuring charges

 

1,556

 

 

-

 

 

 

2,556

 

 

-

        Communication 

 

956

 

 

927

 

 

 

2,556

 

 

2,627

        Printing, postage, stationary and supplies

 

672

 

 

499

 

 

 

1,885

 

 

1,748

        Insurance

 

(366)

 

 

1,620

 

 

 

2,057

 

 

4,580

        Director and investor relations

 

374

 

 

223

 

 

 

934

 

 

800

        Other 

 

663

 

 

1,369

 

 

 

5,325

 

 

8,095

                    Total non-interest expense

 

50,727

 

 

50,941

 

 

 

154,331

 

 

155,362

Income before income taxes

 

8,391

 

 

35,355

 

 

 

78,311

 

 

89,526

        Income tax expense

 

1,008

 

 

12,255

 

 

 

23,479

 

 

29,860

Net income

 

7,383

 

 

23,100

 

 

 

54,832

 

 

59,666

        Less: dividends on preferred stock

 

(1,628)

 

 

(3,466)

 

 

 

(4,884)

 

 

(10,396)

Income available to common shareholders

$

5,755

 

$

19,634

 

 

$

49,948

 

$

49,270

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

        Basic

$

0.11

 

$

0.45

 

 

$

0.97

 

$

1.12

        Diluted

$

0.11

 

$

0.42

 

 

$

0.97

 

$

1.07

Average common shares outstanding and equivalents

 

51,772

 

 

51,464

 

 

 

51,695

 

 

51,344

Cash dividends per share of common stock

$

0.07

 

$

0.06

 

 

$

0.21

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

4 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended September 30,

 

 

Nine-Month Period Ended September 30,

 

2019

 

2018

 

 

2019

 

2018

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

7,383

 

$

23,100

 

 

$

54,832

 

$

59,666

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

5,111

 

 

(6,375)

 

 

 

19,063

 

 

(21,340)

     Realized gain on sale of securities available-for-sale

 

(3,498)

 

 

-

 

 

 

(8,274)

 

 

-

     Unrealized (loss) gain on cash flow hedges

 

(188)

 

 

223

 

 

 

(1,160)

 

 

1,153

Other comprehensive income (loss) before taxes

 

1,425

 

 

(6,152)

 

 

 

9,629

 

 

(20,187)

     Income tax effect

 

(197)

 

 

619

 

 

 

(1,124)

 

 

2,341

Other comprehensive income (loss) after taxes

 

1,228

 

 

(5,533)

 

 

 

8,505

 

 

(17,846)

Comprehensive income

$

8,611

 

$

17,567

 

 

$

63,337

 

$

41,820

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

5 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended September 30,

 

Nine-Month Period Ended September 30,

  

2019

 

2018

 

2019

 

2018

 

(In thousands)

Preferred stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

92,000

 

$

176,000

 

$

92,000

 

$

176,000

       Balance at end of period

 

92,000

 

 

176,000

 

 

92,000

 

 

176,000

Common stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

59,885

 

 

52,626

 

 

59,885

 

 

52,626

       Balance at end of period

 

59,885

 

 

52,626

 

 

59,885

 

 

52,626

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

620,368

 

 

541,734

 

 

619,381

 

 

541,600

Stock-based compensation expense

 

580

 

 

344

 

 

1,567

 

 

978

Stock-based compensation excess tax benefit recognized in income

 

-

 

 

-

 

 

-

 

 

(140)

Lapsed restricted stock units

 

-

 

 

-

 

 

-

 

 

(360)

       Balance at end of period

 

620,948

 

 

542,078

 

 

620,948

 

 

542,078

Legal surplus:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

95,019

 

 

85,249

 

 

90,167

 

 

81,454

Transfer from retained earnings

 

764

 

 

2,314

 

 

5,616

 

 

6,109

       Balance at end of period

 

95,783

 

 

87,563

 

 

95,783

 

 

87,563

Retained earnings:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

284,459

 

 

221,441

 

 

253,040

 

 

200,878

Lease standard initial adoption

 

-

 

 

-

 

 

(736)

 

 

-

Net income

 

7,383

 

 

23,100

 

 

54,832

 

 

59,666

Cash dividends declared on common stock

 

(3,596)

 

 

(2,642)

 

 

(10,782)

 

 

(7,919)

Cash dividends declared on preferred stock

 

(1,628)

 

 

(3,465)

 

 

(4,884)

 

 

(10,396)

Transfer to legal surplus

 

(764)

 

 

(2,314)

 

 

(5,616)

 

 

(6,109)

       Balance at end of period

 

285,854

 

 

236,120

 

 

285,854

 

 

236,120

Treasury stock:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

(103,171)

 

 

(103,969)

 

 

(103,633)

 

 

(104,502)

Lapsed restricted stock units and options

 

235

 

 

263

 

 

697

 

 

796

       Balance at end of period

 

(102,936)

 

 

(103,706)

 

 

(102,936)

 

 

(103,706)

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

(3,686)

 

 

(15,262)

 

 

(10,963)

 

 

(2,949)

Other comprehensive income (loss), net of tax:

 

1,228

 

 

(5,533)

 

 

8,505

 

 

(17,846)

       Balance at end of period

 

(2,458)

 

 

(20,795)

 

 

(2,458)

 

 

(20,795)

Total stockholders’ equity

$

1,049,076

 

$

969,886

 

$

1,049,076

 

$

969,886

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements


OFG BANCORP 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018 

 

 

 

 

 

 

 

  

Nine-Month Period Ended September 30,

  

2019

 

2018

 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

Net income

$

54,832

 

$

59,666

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

 

 

 

 

 

Amortization of deferred loan origination fees and fair value premiums on acquired loans

 

3,250

 

 

3,433

Amortization of investment securities premiums, net of accretion of discounts

 

3,905

 

 

4,426

Amortization of core deposit and customer relationship intangibles

 

877

 

 

989

Net change in operating leases

 

(95)

 

 

-

Depreciation and amortization of premises and equipment

 

6,265

 

 

6,642

Deferred income tax expense, net

 

476

 

 

6,827

Provision for loan losses, net

 

73,724

 

 

44,808

Stock-based compensation

 

1,567

 

 

978

Stock-based compensation excess tax benefit recognized in income

 

-

 

 

(140)

(Gain) loss on:

 

 

 

 

 

   Sale of securities

 

(8,274)

 

 

-

   Sale of loans

 

(380)

 

 

(275)

   Derivatives

 

-

 

 

1

   Early extinguishment of repurchase agreements

 

7

 

 

-

   Foreclosed real estate and other repossessed assets

 

2,666

 

 

2,828

   Sale of other assets

 

(80)

 

 

(107)

Originations of loans held-for-sale

 

(59,879)

 

 

(72,512)

Proceeds from sale of loans held-for-sale

 

15,208

 

 

21,593

Net (increase) decrease in:

 

 

 

 

 

   Trading securities

 

319

 

 

(214)

   Other investments

 

(54)

 

 

-

   Accrued interest receivable

 

3,784

 

 

16,517

   Servicing assets

 

591

 

 

(1,045)

   Other assets

 

463

 

 

2,405

Net (decrease) increase in:

 

 

 

 

 

   Accrued interest on deposits and borrowings

 

(1,875)

 

 

643

   Accrued expenses and other liabilities

 

(56,288)

 

 

(23,836)

Net cash provided by operating activities

 

41,009

 

 

73,627

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

7 


  

Nine-Month Period Ended September 30,

  

2019

 

2018

 

(In thousands)

Cash flows from investing activities:

 

 

 

 

 

Purchases of:

 

 

 

 

 

   Investment securities available-for-sale

 

(1,117)

 

 

(271,062)

   FHLB stock

 

(1,167)

 

 

(113,506)

Maturities and redemptions of:

 

 

 

 

 

   Investment securities available-for-sale

 

129,027

 

 

89,753

   Investment securities held-to-maturity

 

-

 

 

58,477

   FHLB stock

 

3,286

 

 

115,040

Proceeds from sales of:

 

 

 

 

 

   Investment securities available-for-sale

 

680,466

 

 

14,746

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

 

37,115

 

 

38,816

   Loans held-for-investment

 

14,668

 

 

-

   Fully charged-off loans

 

2,382

 

 

-

   Premises and equipment

 

2,113

 

 

1,670

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

 

(834,486)

 

 

(1,015,960)

Principal repayment of loans

 

722,367

 

 

632,333

Additions to premises and equipment

 

(9,160)

 

 

(8,107)

Net cash provided by (used in) investing activities

$

745,494

 

$

(457,800)

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

   Deposits

 

5,242

 

 

301,195

   Securities sold under agreements to repurchase

 

(264,730)

 

 

185,308

   FHLB advances, federal funds purchased, and other borrowings

 

775

 

 

(25,904)

Restricted units lapsed

 

697

 

 

436

Dividends paid on preferred stock

 

(4,881)

 

 

(10,396)

Dividends paid on common stock

 

(10,782)

 

 

(7,919)

Net cash (used in) provided by financing activities

$

(273,679)

 

$

442,720

Net change in cash, cash equivalents and restricted cash

 

512,824

 

 

58,547

Cash, cash equivalents and restricted cash at beginning of period

 

450,063

 

 

488,233

Cash, cash equivalents and restricted cash at end of period

$

962,887

 

 $  

546,780

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

 

 

 

 

 

   Cash and due from banks

$

953,802

 

 $  

537,945

   Money market investments

 

8,035

 

 

5,805

   Restricted cash

 

1,050

 

 

3,030

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

$

962,887

 

$

546,780

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

 

 

 

 

 

Interest paid

$

39,710

 

$

29,523

Income taxes paid

$

36,924

 

$

13,446

Operating lease liabilities paid

$

5,174

 

$

-

Mortgage loans securitized into mortgage-backed securities

$

45,716

 

$

59,050

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

$

424,740

 

$

-

Transfer from loans to foreclosed real estate and other repossessed assets

$

34,532

 

$

36,848

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

$

25,933

 

$

5,795

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

$

49

 

$

1,247

Financed sales of foreclosed real estate

$

1,016

 

$

912

Loans booked under the GNMA buy-back option

$

11,403

 

$

13,325

Initial recognition of operating lease right-of-use assets

$

21,930

 

$

-

Initial recognition of operating lease liabilities

$

23,689

 

$

-

See notes to unaudited consolidated financial statements

8 


OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 –  ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION  

 

Nature of Operations

 

OFG Bancorp (“Oriental”) is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. Oriental operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance LLC. (“Oriental Insurance”), a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and two operating subsidiaries of the Bank, OFG USA LLC ("OFG USA") and Oriental International Bank Inc. (“OIB”). Through these subsidiaries and their respective divisions, Oriental provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, 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.” These acquired businesses have been integrated with Oriental’s existing business.

 

New Accounting Updates Adopted in 2019

 

Leases. In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), the FASB issued ASU No. 2016-02, under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As Oriental elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). Oriental also elected certain relief options offered in ASU 2016-02 including the package of practical expedients and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). Oriental also elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. Oriental has several lease agreements, mainly branch locations, which are considered operating leases, and therefore, were not previously recognized on Oriental’s consolidated statements of financial condition. The new guidance requires these lease agreements to be recognized on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of operations or the consolidated statements of cash flows. See Note 19 Leases for more information.

 

Leases - Targeted Improvements. In July 2018, the FASB issued ASU No. 2018-11 to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for Oriental). Oriental adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on Oriental’s consolidated financial statements.

 

9 


Narrow-Scope Improvements for Lessors. In December 2018, the FASB issued ASU No. 2018-20 which allows lessors to make an accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. Oriental adopted ASU 2018-20 on its required effective date of January 1, 2019 and elected to present sales taxes and other similar taxes collected from lessees on a net basis as described in (1) above. ASU 2018-20 did not have a material impact on Oriental’s consolidated financial statements.

 

Leases: Codification Improvements. In March 2019, the FASB issued ASU No. 2019-01 which states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as Oriental) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, Oriental elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on Oriental’s consolidated financial statements.

 

Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued ASU No. 2017-12 with the objectives to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. This guideline allows the entity to elect whether to perform quantitative or qualitative assessments for their hedge accounting transactions. In addition, the guideline provides that “an entity may reclassify a debt security from held-to-maturity (HTM) to available-for-sale (AFS) if the debt security is eligible to be hedged under the last-of-layer method in accordance with paragraph 815-20-25-12A. Any unrealized gain or loss at the date of the transfer shall be recorded in accumulated other comprehensive income in accordance with paragraph 320-10-35-10(c).” Transition elections must be adopted within the timeframe outlined in paragraphs 815-20-65-3(f) to 65-3(g). This includes the transition election available for the transfer of eligible securities from the HTM to the AFS category. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. Oriental elected to maintain its current quantitative assessment for the existing hedge accounting transaction. In addition, Oriental elected to reclassify all of the securities in its held-to-maturity portfolio amounting to $424.7 million to its available-for-sale portfolio, as they were debt securities that qualified as eligible to be hedged under the last-of-layer method. The new guidance did not have a material impact on the consolidated statements of operations or the consolidated statement of cash flows.

 

New Accounting Updates Not Yet Adopted

 

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, ASU 2018-15 requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The ASU also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This ASU is the final version of Proposed Accounting Standards Update 2018–230—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which has been deleted. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. The effects of this standard on our consolidated statement of financial position, results of operations or cash flows are not expected to be material.

 

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, which modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after

10 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

December 15, 2019.  Implementation on a prospective or retrospective basis varies by specific disclosure requirement.  Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date.

 

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which simplifies the measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. The effects of this standard on our consolidated statement of financial position, results of operations or cash flows are not expected to be material.

 

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13 for the recognition of credit losses on financial instruments. The guidance introduces a new credit reserving methodology known as the Current Expected Credit Loss (“CECL”) methodology, which differs significantly from the incurred loss approach used today and will alter the estimation process, inputs and assumptions used in estimating the allowance for credit losses (“ACL”). The CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. At the date of adoption, the change in reserves will be recorded in retained earnings as a cumulative-effect adjustment under the modified retrospective method. CECL eliminates the existing guidance for purchase credit-impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, it modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. ASU No. 2016-13 is effective for fiscal years, and interim periods, beginning after December 15, 2019. Oriental will implement ASU No. 2016-13 on January 1, 2020. We continue to evaluate the impact the new guidance will have on our financial position, results of operations and regulatory risk-based capital. Our current planned approach for estimating lifetime credit losses for our loan portfolio includes the following key components:

·          An initial forecast period of one year for all portfolio segments based on historical loss experience, or economic forecast in case of limited historical loss experience;

·          An economic forecast period of two years based on the relation of losses with key economic variables for each portfolio segment;

·          Segmentation of loans into pools that share common risk characteristics;

·          Reversion to the mean period using straight-line method;

·          Used the discounted cash flow (DCF) method to measure credit impairment on most of our loan portfolios and estimate lifetime credit losses using the conceptual components described above; and

·          A most likely macroeconomic scenario in estimating expected credit losses.

As part of our evaluation of the estimated impacts of CECL, we have run simulations based on our portfolio composition and current expectations of future economic conditions. The results of those preliminary simulations indicate that our total reserves for credit losses related to our originated book, which accounts for 84% of total gross loans, could have a net increase between 16 % and 23 % as compared to the incurred loss model applied as of balance sheet date, mostly driven by the retail loan portfolios. At adoption, we expect to have a cumulative-effect adjustment to retained earnings for this change in the ACL, which would impact our capital. Oriental expects to continue to be well capitalized under the Basel III regulatory framework after the adoption of this standard. The Company will avail itself of the option to phase-in over a period of three years the day one effects on regulatory capital from the adoption of CECL. For the acquired book, which represents 16% of total gross loans, we expect its allowance will be enough to cover CECL implementation. Any adjustment will be made through the allowance and loan balances with no impact in capital. The ultimate effect of CECL on our ACL will depend on the size and composition of our portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. We are continuing our cross-functional implementation efforts and have substantially completed development of our CECL models. Model validation, user acceptance testing, and parallel runs will continue through the remainder of 2019. In addition, we continue to develop the business processes, policies and controls that satisfy the requirements of the new guidance.

 

For available-for-sale debt securities, the new guidance prospectively replaces the other-than-temporary impairment model and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is determined to be other-than-temporary. Our available-for-sale debt securities only consist of U.S. Treasury or U.S. government-sponsored agencies securities; therefore, we do not currently expect the impact of the new guidance on available-for-sale securities to be material at adoption.  

11 


 

NOTE 2 SIGNIFICANT EVENTS

 

On June 26, 2019, OFG Bancorp (the “Company”) and Oriental Bank, a wholly-owned subsidiary of the Company (“Oriental Bank”), entered into (i) a definitive Stock Purchase Agreement (the “Stock Purchase Agreement”) with The Bank of Nova Scotia (“BNS”), (ii) a definitive Sale and Purchase Agreement (USVI) (the “USVI Purchase Agreement”) with BNS and (iii) a definitive Sale and Purchase Agreement (PR) (the “PR Purchase Agreement” and, together with the Stock Purchase Agreement and the USVI Purchase Agreement, the “Purchase Agreements”) with BNS.

 

The transactions contemplated by the Purchase Agreements (the “Scotiabank Transaction”), which are expected to close before year end of 2019, are subject to receipt of the requisite regulatory approvals, as well as the satisfaction of other customary closing conditions.

 

The Stock Purchase Agreement

 

On the terms and subject to the conditions set forth in the Stock Purchase Agreement, Oriental Bank will acquire (i) all of the issued and outstanding shares of common stock, par value $10.00 per share, of Scotiabank de Puerto Rico, a bank chartered under the laws of Puerto Rico (“SBPR”), and (ii) all of the issued and outstanding shares of second preferred non-cumulative redeemable stock, par value $10.00 per share, of SBPR (the “Preferred Stock”) (excluding any shares of Preferred Stock redeemed by SBPR prior to the SBPR Closing (as defined below) ((i) and (ii), the “Stock Purchase”). In addition, the Stock Purchase Agreement contemplates that, immediately following the consummation of the Stock Purchase, SBPR will merge with and into Oriental Bank, with Oriental Bank continuing as the surviving bank (the “Bank Merger”).

 

The consideration payable by Oriental Bank to BNS at the closing of the Stock Purchase (the “SBPR Closing” and the date on which the SBPR Closing occurs, the “Closing Date”) will be $550,000,000 in cash minus the amount of any Pre-Closing Secondary Dividend (as defined below) actually paid to BNS after the execution of the Stock Purchase Agreement but on or prior to the Closing Date. In addition, the Stock Purchase Agreement contemplates that, prior to the SBPR Closing, SBPR will pay BNS (a) one or more dividends in an aggregate amount equal to $200,000,000 (subject to certain adjustments set forth in the schedules to the Stock Purchase Agreement) (the “Pre-Closing Primary Dividend”) and (b) secondarily to the Pre-Closing Primary Dividend, one or more additional dividends in an aggregate amount not to exceed $125,000,000 (the “Pre-Closing Secondary Dividend”).

 

The obligations of Oriental Bank and BNS to consummate the Stock Purchase are subject to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of the requisite regulatory approvals, including the requisite regulatory approvals of the Puerto Rico Office of the Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (and, in the case of Oriental Bank’s obligations to consummate the Stock Purchase, without the imposition of a Burdensome Condition (as defined below)), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the Stock Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the Stock Purchase, the Bank Merger or the other transactions contemplated by the Stock Purchase Agreement. The obligations of BNS to consummate the Stock Purchase are also subject to receiving the requisite regulatory approval for the payment of the Pre-Closing Primary Dividend. The Stock Purchase is not conditioned on the consummation of the transactions contemplated by the USVI Purchase Agreement or the PR Purchase Agreement.

 

Under the Stock Purchase Agreement, Oriental Bank and BNS agreed to use reasonable best efforts to obtain the requisite regulatory approvals. In addition, the Company and Oriental Bank agreed to take all actions necessary (including Remedial Actions and Capital Actions (each as defined in the Stock Purchase Agreement)) to obtain the applicable requisite regulatory approvals and consummate the Scotiabank Transaction as promptly as practicable, subject to an exception that provides that neither the Company nor Oriental Bank is required to take, or agree to take, any action that would constitute a Burdensome Condition. Under the Stock Purchase Agreement, the term “Remedial Action” is defined to include, among other things, divestitures, licenses or other dispositions of, or the holding separate of, deposits, loans, branches or operations of SBPR, the Company, Oriental Bank or their affiliates, and the term “Capital Acton” is defined to include, among other things, capital level and capital ratio maintenance commitments, capital plan creation and capital raising transactions. The Stock Purchase Agreement defines “Burdensome Condition” as any action, restriction or condition that would reasonably be expected to be materially burdensome to the Company, Oriental Bank and their affiliates, taken as a whole, following the consummation of the Stock Purchase, the Bank Merger or the transactions contemplated by the USVI Purchase Agreement or the PR Purchase Agreement. However, the Stock Purchase Agreement provides that a Capital Action will not constitute or be considered in determining whether any required action constitutes, a Burdensome Condition.

12 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

The Stock Purchase Agreement provides that, for three years after the Closing Date, BNS will not operate an FDIC-insured depository institution in Puerto Rico, offer retail banking or retail consumer finance products or services in Puerto Rico (excluding certain wealth management services) or accept deposits insured by the FDIC in Puerto Rico, in each case, subject to certain exceptions set forth in the Stock Purchase Agreement. In addition, from the date of the Stock Purchase Agreement and continuing for two years following the Closing Date, BNS agreed to certain restrictions on soliciting and hiring SBPR employees and soliciting SBPR customers, and Oriental Bank agreed to certain restrictions on soliciting and hiring certain BNS employees and soliciting certain BNS customers, in each case, subject to certain exceptions set forth in the Stock Purchase Agreement.

 

The Stock Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the Stock Purchase Agreement. Each of Oriental Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the conduct of SBPR’s business prior to the SBPR Closing. The Stock Purchase Agreement provides for post-Closing indemnification obligations with respect to breaches of the representations, warranties and covenants of each party in the Purchase Agreements, as well as indemnification obligations with respect to certain other matters. Each party’s indemnification obligations with respect to breaches of its representations and warranties generally are subject to a de minimis “per loss” requirement of $100,000, a deductible basket equal to 1% of the aggregate purchase price under the Purchase Agreements and a cap equal to 10% of the aggregate purchase price under the Purchase Agreements, except for breaches of certain fundamental representations and warranties. Following the SBPR Closing, during any period in which the USVI Transaction (as defined below) or the PR Transaction (as defined below) has not been consummated, the indemnification deductible basket will be reduced by 1% of the purchase price under the USVI Purchase Agreement and 1% of the purchase price under the PR Purchase Agreement, as applicable, and the indemnification cap will be reduced by 10% of the purchase price under the USVI Purchase Agreement and 10% of the purchase price under the PR Purchase Agreement, as applicable.

 

Each party has the right to terminate the Stock Purchase Agreement under certain circumstances, including if the Stock Purchase has not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. Upon the termination of the Stock Purchase Agreement as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The Stock Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

 

USVI Purchase Agreement

 

On the terms and subject to the conditions set forth in the USVI Purchase Agreement, at the closing of the transactions contemplated by the USVI Purchase Agreement (the “USVI Closing” and the date on which the USVI Closing occurs the “USVI Closing Date”), Oriental Bank will acquire the U.S. Virgin Islands (the “USVIs”) 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) (the “USVI Transaction”). The consideration payable in the USVI Transaction will be equal to the difference between (a) the sum of (i) cash on hand at the purchased branches and cash located in the purchased ATMs, (ii) the net book value of the purchased assets (which, in the case of the purchased loans, will be equal to the gross book value of the purchased loans minus $6,700,000 (or, if greater, the actual amount of reserves associated with the purchase loans as of the close of business on the day immediately preceding the USVI Closing Date)), (iii) a $10,000,000 deposit premium and (iv) the fair market value of Other Assets (as defined in the USVI Purchase Agreement) that Oriental Bank elects to include as a purchased asset and (b) the net book value of the assumed liabilities, in each case, as of the close of business on the day immediately preceding the USVI Closing Date. If the foregoing calculation produces a positive number, that amount will be payable by Oriental Bank to BNS at the USVI Closing and if the foregoing calculation produces a negative number, the absolute value of that amount will be payable by BNS to Oriental Bank at the USVI Closing.

 

The obligations of Oriental Bank and BNS to consummate the USVI Transaction are subject to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of the requisite regulatory approvals, including the requisite regulatory approvals of the Puerto Rico Office of the Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Virgin Islands Banking Board and the Lieutenant Governor of the Virgin Islands, Division of Banking, Insurance and Financial Regulation (and, in the case of Oriental Bank’s obligations to consummate the USVI Transaction, without the imposition of a Burdensome Condition), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the USVI Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the transactions

13 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

contemplated by the USVI Purchase Agreement. The consummation of the USVI Transaction is also subject to the consummation of the Stock Purchase either substantially contemporaneously with or prior to the USVI Closing.

 

The covenants and agreements in the Stock Purchase Agreement that address the obligations of the parties to obtain the requisite regulatory approvals, including those provisions addressing Remedial Actions, Capital Actions and Burdensome Conditions, also apply under the USVI Purchase Agreement with respect to the requisite regulatory approvals for the USVI Transactions.

 

The USVI Purchase Agreement provides that, for three years after the USVI Closing Date, BNS will not (a) open or operate a branch, subsidiary or depository institution that accepts deposits in the USVIs or (b) offer retail banking or retail consumer finance products or services in the USVIs (excluding certain wealth management services), in each case, subject to certain exceptions set forth in the USVI Purchase Agreement. In addition, from the date of the USVI Purchase Agreement and continuing for two years following the USVI Closing Date, BNS agreed to certain restrictions on soliciting and hiring USVI branch employees and soliciting USVI branch customers, in each case, subject to certain exceptions set forth in the USVI Purchase Agreement.

 

The USVI Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the USVI Purchase Agreement. Each of Oriental Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the conduct of the USVI branch business prior to the USVI Closing.

 

Each party has the right to terminate the USVI Purchase Agreement under certain circumstances, including if (i) the Stock Purchase Agreement has been terminated or (ii) the USVI Transactions have not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. If the Stock Purchase has not been consummated and the USVI Purchase Agreement is terminated as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The USVI Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

 

PR Purchase Agreement

 

On the terms and subject to the conditions set forth in the PR Purchase Agreement, at the closing of the transactions contemplated by the PR Purchase Agreement (the “PR Closing” and the date on which the PR Closing occurs, the “PR Closing Date”), Oriental Bank will acquire certain loans and other assets, and assume certain deposits and other liabilities, from BNS’s Puerto Rico branch (the “PR Transaction”). The consideration payable in the PR Transaction will be equal to the difference between (a) the net book value of the purchased assets (which, in the case of the purchased loans, will be equal to the gross book value of the purchased loans minus $27,700,000 (or, if greater, the actual amount of reserves associated with the purchase loans as of the PR Effective Time (as defined in the PR Purchase Agreement))) and (b) the net book value of the assumed liabilities, in each case, as of PR Effective Time. If the foregoing calculation produces a positive number, that amount will be payable by Oriental Bank to BNS at the PR Closing and if the foregoing calculation produces a negative number, the absolute value of that amount will be payable by BNS to Oriental Bank at the PR Closing.

 

The obligations of Oriental Bank and BNS to consummate the PR Transaction are subject to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of required regulatory approvals of the Federal Deposit Insurance Corporation (and, in the case of Oriental Bank’s obligations to consummate the PR Transaction, without the imposition of a Burdensome Condition), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the PR Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the transactions contemplated by the PR Purchase Agreement. The consummation of the PR Transaction is also subject to the consummation of the Stock Purchase either substantially contemporaneously with or prior to the PR Closing.

 

The covenants and agreements in the Stock Purchase Agreement that address the obligations of the parties to obtain the requisite regulatory approvals, including those provisions addressing Remedial Actions, Capital Actions and Burdensome Conditions, also apply under the PR Purchase Agreement with respect to the requisite regulatory approvals for the PR Transaction.

 

14 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Under the PR Purchase Agreement, from the date of the PR Purchase Agreement and continuing for two years following the PR Closing Date, BNS agreed to certain restrictions on soliciting PR branch customers, subject to certain exceptions set forth in the PR Purchase Agreement.

 

The PR Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the PR Purchase Agreement. Each of Oriental Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the administration of the purchased assets and assumed liabilities of PR branch prior to the PR Closing.

 

Each party has the right to terminate the PR Purchase Agreement under certain circumstances, including if (i) the Stock Purchase Agreement has been terminated or (ii) the PR Transactions have not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. If the Stock Purchase has not been consummated and the PR Purchase Agreement is terminated as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The PR Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

 

The foregoing description of the Purchase Agreements and related transactions does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreements, which were filed as Exhibit 2.1, Exhibit 2.2 and Exhibit 2.3 to the Current Report on Form 8-K on July 2, 2019, and are incorporated therein by reference. The Purchase Agreements establish and govern the legal relations between the parties with respect to the transactions contemplated thereby and are not intended to be a source of factual, business or operational information about the parties or their respective businesses. The representations and warranties set forth in the Purchase Agreements may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to shareholders or different from what a shareholder might view as material, may have been used for purposes of allocating risk between the parties to the Purchase Agreements rather than establishing matters as facts, may have been qualified by certain disclosures not reflected in the Purchase Agreements that were made to the other party in connection with the negotiation of the Purchase Agreements and generally were solely for the benefit of the parties to the Purchase Agreements.

 

Accordingly, investors and security holders should not rely on such representations and warranties as characterizations of the actual state of facts or circumstances because they were only made as of the date of the Purchase Agreements and are modified by confidential disclosure schedules delivered in connection with the Purchase Agreements. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Purchase Agreements, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

 

NOTE 3 – RESTRICTED CASH

 

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

 

   

September 30,

 

December 31,

 

2019

 

2018

 

(In thousands)

Cash pledged as collateral to other financial institutions to secure:

 

 

 

 

 

    Derivatives

$

-

 

$

1,980

    Obligations under agreement of loans sold with recourse

 

1,050

 

 

1,050

 

$

1,050

 

$

3,030

 

At September 30, 2019 and December 31, 2018, the Bank’s international banking entities, OIB and Oriental Overseas, a division of the Bank, held short-term highly liquid securities in the amount of $305 thousand and $325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law.  These instruments cannot be withdrawn or transferred by OIB or Oriental Overseas without the prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (the "OCFI").

 

As part of its derivative activities, Oriental enters into collateral agreements with certain financial counterparties.  At September 30, 2019 collateral agreements have expired. At December 31, 2018, Oriental had delivered approximately $2.0 million of cash as collateral for such derivatives activities.

 

15 


Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At September 30, 2019 and December 31, 2018, Oriental delivered as collateral cash amounting to approximately $1.1 million, for both periods.

 

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered September 30, 2019 was $210.4 million (December 31, 2018 - $211.6 million). At September 30, 2019 and December 31, 2018, the Bank complied with this requirement. Cash and due from bank as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

16 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 4 – INVESTMENT SECURITIES

 

Money Market Investments

 

Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At September 30, 2019 and December 31, 2018, money market instruments included as part of cash and cash equivalents amounted to $8.0 million and $4.9 million, respectively.

 

Investment Securities

 

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at September 30, 2019 and December 31, 2018 were as follows:

 

  

September 30, 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

$

426,192

 

$

563

 

$

2,586

 

$

424,169

 

2.01%

        GNMA certificates

 

25,329

 

 

502

 

 

-

 

 

25,831

 

2.87%

        CMOs issued by US government-sponsored agencies

 

55,457

 

 

17

 

 

371

 

 

55,103

 

1.90%

            Total mortgage-backed securities

 

506,978

 

 

1,082

 

 

2,957

 

 

505,103

 

2.04%

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

 

10,947

 

 

-

 

 

10

 

 

10,937

 

1.33%

        Obligations of US government-sponsored agencies

 

2,040

 

 

-

 

 

10

 

 

2,030

 

1.38%

        Other debt securities

 

995

 

 

30

 

 

-

 

 

1,025

 

2.99%

            Total investment securities

 

13,982

 

 

30

 

 

20

 

 

13,992

 

1.45%

               Total securities available for sale

$

520,960

 

$

1,112

 

$

2,977

 

$

519,095

 

2.02%

 

17 


  

December 31, 2018

 

 

 

Gross

 

Gross

 

 

 

Weighted

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Average

  

Cost

 

Gains

 

Losses

 

Value

 

Yield

 

(In thousands)

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

561,878

 

$

404

 

$

8,951

 

$

553,331

 

2.59%

        GNMA certificates

 

211,947

 

 

1,050

 

 

2,827

 

 

210,170

 

3.10%

        CMOs issued by US government-sponsored agencies

 

66,230

 

 

-

 

 

2,166

 

 

64,064

 

1.90%

            Total mortgage-backed securities

 

840,055

 

 

1,454

 

 

13,944

 

 

827,565

 

2.66%

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

 

10,924

 

 

-

 

 

119

 

 

10,805

 

1.36%

        Obligations of US government-sponsored agencies

 

2,325

 

 

-

 

 

60

 

 

2,265

 

1.38%

        Other debt securities

 

1,207

 

 

15

 

 

-

 

 

1,222

 

2.99%

            Total investment securities

 

14,456

 

 

15

 

 

179

 

 

14,292

 

1.50%

                Total securities available-for-sale

$

854,511

 

$

1,469

 

$

14,123

 

$

841,857

 

2.64%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

424,740

 

$

-

 

$

14,387

 

$

410,353

 

2.07%

 

On January 1, 2019, Oriental adopted the ASU No. 2017-12 and reclassified all of its mortgage backed securities with a carrying value of $424.7 million and unrealized losses of $14.4 million from the held-to-maturity portfolio into the available-for-sale portfolio.

 

The amortized cost and fair value of Oriental’s investment securities at September 30, 2019, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

September 30, 2019

  

Available-for-sale

 

Amortized Cost

 

Fair Value

 

(In thousands)

Mortgage-backed securities

 

 

 

 

 

    Due from 1 to 5 years

 

 

 

 

 

        FNMA and FHLMC certificates

$

2,041

 

$

2,070

            Total due from 1 to 5 years

 

2,041

 

 

2,070

    Due after 5 to 10 years

 

 

 

 

 

        CMOs issued by US government-sponsored agencies

$

48,756

 

$

48,401

        FNMA and FHLMC certificates

 

108,573

 

 

108,256

            Total due after 5 to 10 years

 

157,329

 

 

156,657

    Due after 10 years

 

 

 

 

 

        FNMA and FHLMC certificates

$

315,578

 

$

313,843

        GNMA certificates

 

25,329

 

 

25,831

        CMOs issued by US government-sponsored agencies

 

6,701

 

 

6,702

            Total due after 10 years

 

347,608

 

 

346,376

                Total  mortgage-backed securities

 

506,978

 

 

505,103

Investment securities

 

 

 

 

 

    Due less than one year

 

 

 

 

 

        US Treasury securities

$

10,947

 

$

10,937

            Total due in less than one year

 

10,947

 

 

10,937

    Due from 1 to 5 years

 

 

 

 

 

        Obligations of US government-sponsored agencies

$

2,040

 

$

2,030

        Other debt securities

 

100

 

 

100

            Total due from 1 to 5 years

 

2,140

 

 

2,130

    Due from 5 to 10 years

 

 

 

 

 

        Other debt securities

 

895

 

 

925

            Total due after 5 to 10 years

 

895

 

 

925

                Total  investment securities

 

13,982

 

 

13,992

Total

$

520,960

 

$

519,095

18 


 

During the nine-month period ended September 30, 2019, Oriental retained securitized GNMA pools totaling $45.7 million amortized cost, at a yield of 3.42% from its own originations, and during the nine-month period ended September 30, 2018, Oriental did not retain any securitized GNMA pools.

 

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. During the nine-month period ended September 30, 2018, Oriental sold $14.7 million of available-for-sale Government National Mortgage Association (“GNMA”) certificates from its recurring mortgage loan origination and securitization activities. Oriental did not realize any gains or losses these sales during such period.

 

 

 

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

 

$

-

        GNMA certificates

$

229,385

 

$

224,887

 

$

4,498

 

$

-

Total

$

680,466

 

$

672,192

 

$

8,274