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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of OFG Bancorp (“OFG” or the “Company”) conform with GAAP and to banking industry practices. The following is a description of OFG’s most significant accounting policies:
Nature of Operations
OFG is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. OFG operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer and investment adviser, Oriental Financial Services LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), a captive reinsurance company organized under the laws of the Cayman Islands in 2021, OFG Reinsurance Ltd (“OFG Reinsurance”), and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). OFG also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”) and two other limited liability company subsidiaries, OFG USA LLC (“OFG USA”) and OFG Ventures LLC (“OFG Ventures”), which holds investments. Through these subsidiaries and their respective divisions, OFG 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.
OFG conducts its business through its main office in San Juan, Puerto Rico, fifty branches in Puerto Rico and two branches in the U.S. Virgin Islands (the “USVI”). OFG has three subsidiaries with operations in Puerto Rico: the Bank, Oriental Financial Services and Oriental Insurance; one subsidiary in the United States, OPC; and one subsidiary in the Cayman Islands, OFG Reinsurance. OFG is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the U.S. Bank Holding Company Act of 1956, as amended, and the Dodd-Frank Act.
The Bank is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Bank offers banking services such as commercial and consumer lending, leasing, auto loans, savings and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. The Bank has an operating subsidiary, OFG USA, a wholly-owned subsidiary of the Bank, which is a commercial lender organized in Delaware. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas, a division of the Bank, are international banking entities licensed pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended. OIB and Oriental Overseas offer the Bank certain Puerto Rico tax advantages. Their activities are limited under Puerto Rico law to persons located in Puerto Rico with assets/liabilities located outside of Puerto Rico. The Bank’s USVI operations are also subject to the supervision, examination and regulation of the USVI Banking Board.
Oriental Financial Services is registered as a securities broker-dealer and as an investment adviser, and is subject to the supervision, examination and regulation of the Financial Industry Regulatory Authority (“FINRA”), the U.S. Securities and Exchange Commission (the “SEC”), and the OCFI. Oriental Financial Services is also a member of the Securities Investor Protection Corporation. Oriental Insurance is an insurance agency and is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico. OFG Reinsurance is subject to regulation by the Cayman Islands Monetary Authority (the “CIMA”).
OFG’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the origination of mortgage loans for the Bank’s own portfolio, the sale of loans directly in the secondary market or the securitization of conforming loans into mortgage-backed securities, and the purchase or assumption of the right to service loans originated by others. The Bank originates Federal Housing Administration (“FHA”) insured and Veterans Administration (“VA”) guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under certain Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA and FHLMC mortgage loans for issuance of FNMA and FHLMC
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mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed securities. The Bank is the master servicer of the GNMA, FNMA and FHLMC pools that it issues and of its mortgage loan portfolio and has a subservicing arrangement with a third party for a portion of its acquired loan portfolio. OFG services most of its mortgage loan portfolio.
On December 31, 2019, Oriental Bank purchased from The Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”) and immediately merged SBPR with and into the Bank, with the Bank continuing as the surviving entity. As part of this transaction, the Bank also acquired the USVI banking operations of BNS through the acquisition of certain assets and the assumption of certain liabilities. In addition, the Bank acquired certain loans and assumed certain liabilities, from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank Acquisition”.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OFG Bancorp and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Statutory Trust II is exempt from the consolidation requirements of GAAP.
Business Combinations
OFG accounted for the Scotiabank Acquisition under the accounting guidance of ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for credit losses related to the acquired loans was recorded on the acquisition date. Loans acquired were recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. These fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. The valuation of these loans required management to make subjective judgments concerning estimates about how the acquired loans would perform in the future using valuation methods, including discounted cash flow analyses and other factors as market-based and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses, estimated timing of credit losses including the timing of foreclosure and liquidation of collateral, expected prepayment rates, and specific industry and market conditions. Refer to Note 2 Business Combination for further discussion of the Scotiabank Acquisition.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to the determination of the allowance for credit losses, the valuation of securities, the determination of income taxes, impairment of securities, and goodwill valuation and impairment assessment.
Earnings per Common Share
Basic earnings per share is calculated by dividing income available to common shareholders (net income reduced by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average of common shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares underlying stock options and restricted units had been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements.
Cash Equivalents
OFG considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less.
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Investment Securities
OFG classifies its investments in debt and equity securities into one of four categories:
Held-to-maturity - Securities that management has the intent and ability to hold to maturity. These securities are carried at amortized cost. Since the adoption of CECL on January 1, 2020, an allowance for credit losses is established for the expected credit losses over the remaining term of debt securities held to maturity. OFG’s portfolio of held to maturity securities is comprised of obligations from the U.S. Government. These securities have an explicit or implicit guarantee from the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, OFG applies a zero-credit loss assumption and no ACL for these securities has been established. OFG monitors its securities portfolio composition and credit performance on a quarterly basis to determine if any allowance is considered necessary.
Available for sale - Securities to be held for indefinite periods of time. These securities are carried at fair value. Declines in fair value below the securities’ amortized cost which are not related to estimated credit losses are recorded through other comprehensive income or loss, net of taxes. If OFG intends to sell or believes it is more likely than not that it will be required to sell the debt security, it is written down to fair value through earnings. Since the adoption of CECL on January 1, 2020, credit losses relating to available-for-sale debt securities are recorded through an ACL, which are limited to the difference between the amortized cost and the fair value of the asset. The ACL is established for the expected credit losses over the remaining term of debt security. OFG’s portfolio of available for sale securities is comprised mainly of U.S. Treasury notes and obligations from the U.S. Government. These securities have an explicit or implicit guarantee from the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, OFG applies a zero-credit loss assumption and no ACL for these securities has been established. OFG monitors its securities portfolio composition and credit performance on a quarterly basis to determine if any allowance is considered necessary. Debt securities available-for-sale are written-off when a portion or the entire amount is deemed uncollectible, based on the information considered to develop expected credit losses through the life of the asset. The specific identification method is used to determine realized gains and losses on debt securities available for sale, which are included in net gain (loss) on sale of securities in the Consolidated Statements of Operations.
Trading - Securities held for resale in anticipation of short-term market movements. These securities 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.
Equity securities - Equity securities do not have readily available fair values and are measured at cost, less any impairment. Impairment is reviewed on a quarterly basis through a qualitative assessment. Stock that is owned by OFG to comply with regulatory requirements, such as Federal Home Loan Bank (“FHLB”) stock, is included in this category, and their realizable value equals their cost. Unrealized and realized gains and losses and any impairment on equity securities are included in net gain (loss), including impairment on equity securities in the Consolidated Statements of Operations. Dividend income from investments in equity securities is included in interest income in the Consolidated Statements of Operations.
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. Purchases and sales of securities are recorded at trade date. The cost of securities sold is determined by the specific identification method.
Financial Instruments
Certain financial instruments, including derivatives, trading securities and investment securities available-for-sale, are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income (loss) or as part of non-interest income, as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as the well as time value and yield curve or volatility factors underlying the positions.
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OFG determines the fair value of its financial instruments based on the fair value measurement framework, which establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 — Level 1 assets and liabilities include equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation.
During the year ended December 31, 2021, OFG transferred from level 2 to level 3 a $1.5 million convertible note classified as other debt securities. For more information about this reclassification, see Note 28 - Fair Value of Financial Instruments. There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2020, and 2019. OFG’s policy is to recognize transfers at the date of the event or change in circumstances that caused the transfer.
Derivative Instruments and Hedging Activities
OFG uses financial derivatives, as interest rate swaps and caps, to both mitigate exposure to market (primarily interest rate) and credit risks inherent in its business activities, as well as to facilitate customer risk management activities. OFG manages these risks as part of its asset and liability management process and through credit policies and procedures.
OFG recognizes all derivative instruments at fair value as either other assets or derivative liabilities on the consolidated statement of financial condition and the related cash flows in the operating activities section of the consolidated statement of cash flows. Adjustments for counterparty credit risk are included in the determination of fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a cash flow or net investment hedging relationship. For all other derivatives, changes in fair value are recognized in earnings.
OFG utilizes a net presentation for derivative instruments on the consolidated statement of financial condition taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative exposures by offsetting obligations to return, or general rights to reclaim, cash collateral against the fair values of the net derivatives being collateralized.
For those derivative instruments that are designated and qualify as accounting hedges, OFG designates the hedging instrument, based on the exposure being hedged, as a cash flow hedge. OFG formally documents the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy, before undertaking an accounting hedge.
To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge at inception of the hedge relationship. In addition, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. For accounting hedge relationships, OFG formally assesses, both at the inception of the hedge and on an ongoing basis, if the derivatives are highly effective in offsetting designated changes in the fair value or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued. OFG
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assesses effectiveness using statistical regression analysis. Where the critical terms of the derivative and hedged item match, effectiveness may be assessed qualitatively.
For derivatives designated as cash flow hedges (hedging the exposure to variability in expected future cash flows), the gain or loss on derivatives is reported as a component of AOCI and subsequently reclassified to income in the same period or periods during which the hedged cash flows affect earnings and recorded in the same income statement line item as the hedged cash flows.
OFG discontinues hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is de-designated as a cash flow hedge.
Mortgage Banking Activities and Mortgage Loans Held-For-Sale
The residential mortgage loans reported as held-for-sale are stated at the lower of cost or fair value, cost being determined on the outstanding loan balance less unearned income, and fair value determined in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific identification method. Loans held-for-sale include all conforming mortgage loans originated and purchased, which from time to time Oriental sells to other financial institutions or securitizes conforming mortgage loans into GNMA, FNMA and FHLMC pass-through certificates.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
OFG recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. OFG is not engaged in sales of mortgage loans and mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale transactions.
The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which OFG surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in Accounting Standards Codification ("ASC") Topic 860 are met: (i) the assets must be isolated from creditors of the transferor, (ii) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When OFG transfers financial assets and the transfer fails any one of these criteria, OFG is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For transfers of financial assets that satisfy the conditions to be accounted for as sales, OFG derecognizes all assets sold; recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of financial assets requires a true sale analysis of the treatment of the transfer under state law as if OFG was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the intent of the parties, the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, and contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as any unsettled matters of state law or common law. Once the legal isolation test has been met, other factors concerning the nature and extent of the transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted.
When OFG sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. Conforming conventional mortgage loans are combined into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or sold directly to FNMA or other private investors for cash. To the extent the loans do not meet the specified characteristics, investors are generally entitled to require OFG to repurchase such loans or indemnify the investor against losses if the assets do not meet certain guidelines. GNMA programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which OFG provides servicing. At OFG’s option and without GNMA prior authorization, OFG may repurchase such delinquent loans for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a conditional option until the delinquency criteria is met, at which time the option becomes unconditional. When the loans backing a GNMA security are initially securitized, OFG treats the transaction as a sale for accounting purposes because the conditional nature of the buy-back option means that OFG does
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not maintain effective control over the loans and, therefore, these are derecognized from the statement of financial condition. When individual loans later meet GNMA’s specified delinquency criteria and are eligible for repurchase, OFG is deemed to have regained effective control over these loans, and these must be brought back onto OFG’s books as assets, regardless of whether OFG intends to exercise the buy-back option. Quality review procedures are performed by OFG as required under the government agency programs to ensure that asset guideline qualifications are met. OFG has not recorded any specific contingent liability in the consolidated financial statements for these customary representation and warranties related to loans sold by OFG, and management believes that, based on historical data, the probability of payments and expected losses under these representation and warranty arrangements is not significant.
OFG has liability for residential mortgage loans sold subject to credit recourse, principally loans associated with FNMA residential mortgage loan sales and securitization programs. In the event of any customer default, pursuant to the credit recourse provided, OFG is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that OFG would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. In the event of nonperformance by the borrower, OFG has rights to the underlying collateral securing the mortgage loan. OFG suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. OFG has established a liability to cover the estimated credit loss exposure related to loans sold with credit recourse.
The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (included as mortgage banking activities in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. The methodology leverages the expected loss framework for mortgage loans to estimate expected future losses. The reserve for the estimated losses under the credit recourse arrangements is presented separately within other liabilities in the consolidated statements of financial condition.
Servicing Assets
OFG periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, OFG may purchase or assume the right to service mortgage loans originated by others. Whenever OFG 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 OFG for servicing the loans. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate OFG for its expected cost.
All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, OFG measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing asset in the statement of operations in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statement of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.
Loans and Allowance for Credit Losses
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.
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.
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OFG discontinues accrual of interest after payments become more than 90 days past due or earlier if OFG 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 effective yield on the Non-PCD loans.
Purchased Credit Deteriorated (PCD) Loans: OFG has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. OFG 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 cash flow methodology.
Upon adoption of CECL, OFG 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: On January 1, 2020, OFG adopted CECL, which utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected credit losses. 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. OFG continues to monitor and modify the level of the ACL to ensure it is adequate.
Our methodology for estimating 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 nonaccrual 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. As part of the calculation of the contractual term, expected extension are generally not considered unless the option to extend the loan cannot be canceled unilaterally by OFG, and loan modifications are also not considered, unless OFG has a reasonable expectation that it will execute a troubled debt restructuring (“TDR”). In the case of
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unconditionally cancellable 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 cancellable.
•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 amortized cost, and UDCF method for the PCD portfolio using the unpaid principal balance. For the EAD, the Company uses a prepayment model which projects prepayments over the life of the loans.
•An economic forecast period based on the relationship of losses with key economic variables for each portfolio segment; OFG 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 adjustment to consider factors for asset-specific risk characteristics to the extent they do not exist in the historical information that have not been accounted and could impact the amount of future losses. For example, factors that OFG 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 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.
In our loss forecasting framework, OFG incorporates forward-looking information through the use of macroeconomic scenarios. 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, employment rates, real estate prices, gross domestic product levels, gross national product levels, and retail sales. As any one economic outlook is inherently uncertain, OFG 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.
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. OFG 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 $54.8 million and $64.5 million on December 31, 2021 and 2020, 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 $23.9 million at December 31, 2021 (December 31, 2020 - $35.4 million), of which $21.5 million (December 31, 2020 - 30.5 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 $161 thousand and $711 thousand at December 31, 2021 and 2020, respectively.
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.
OFG 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.
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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 OFG’s current credit policies, and procedures for these portfolios. The estimate of 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 employment rates (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 nonaccrual 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 OFG 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.
OFG’s lending activities in the continental United States – referred to as U.S. commercial loans – are conducted through OIB and OFG USA. These activities include the purchase of middle market senior secured cash flow loan participations and the purchase of participations of loans to small and medium sized businesses.
OFG participated in the Paycheck Protection Program (PPP), which is a loan program that originated from the CARES Act and was subsequently expanded by the Paycheck Protection Program and Health Care Enhancement Act. The PPP was designed to provide U.S. small businesses with cash-flow assistance through loans fully guaranteed by the Small Business Administration ("SBA"). If the borrower met certain criteria and used the proceeds towards certain eligible expenses, the borrower’s obligation to repay the loan can be forgiven up to the full principal amount of the loan and any accrued interest. Upon borrower forgiveness, the SBA pays OFG for the principal and accrued interest owed on the loan. If the full principal of the loan is not forgiven, the loan will operate according to the original loan terms with the 100 percent SBA guaranty remaining. As compensation for originating the loans, OFG received lender processing fees from the SBA, which are capitalized, along with the loan origination costs, and will be amortized over the loans’ contractual lives and recognized as interest income. Upon forgiveness of a loan and repayment by the SBA, any unrecognized net capitalized fees and costs related to the loan will be recognized as interest income in that period.
Mortgage Loans – This segment includes traditional mortgages, non-traditional mortgages, mortgages in the loss mitigation program, residential performing TDRs and residential non-performing TDRs. The most significant attribute in estimating OFG’s lifetime expected credit losses is the vintage. The estimates are based on OFG’s historical experience with the loan portfolio, adjusted to reflect the economic outlook. The outlook on the housing price index and unemployment are key factors that impact the frequency and severity of loss estimates. OFG expects to collect the amortized cost basis of government insured residential loans due to the nature of the government guarantee, so the 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 OFG’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, OFG will record additional charge-offs.
Consumer Loans – This portfolio consists of smaller retail loans such as unsecured personal loans, unsecured personal lines of credit, retail credit cards and overdrafts. The estimates are based on the OFG’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
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date. OFG 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. Future draws on the credit card lines are excluded from the estimated 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. The most significant attribute in estimating OFG’s expected credit losses is the FICO score. The estimates are based on OFG’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.
For the principal enhancements that management made to its methodology, refer to Note 7.
Allowance for Loan and Lease Losses Under the Incurred Losses Model for the Year Ended December 31, 2019
OFG followed a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide for inherent losses in loan portfolio. This methodology included the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans.
OFG’s assessment of the allowance for loan losses was determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, OFG determined the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in expected cash flows after the acquisition date.
The quantitative component used a loss factor for the general reserve of these loans established by considering OFG’s historical loss experience adjusted for an estimated loss emergence period and the consideration of qualitative factors. Qualitative factors considered were: change in non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes in collateral values; changes in risk selections and underwriting standards, and other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff, including OFG’s loan review system; national and local economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of estimated credit losses. The sum of the adjusted loss experience factors and the qualitative factors were the general valuation reserve (“GVA”) factor used for the determination of the allowance for loan and lease losses in each category.
Loans and Leases Held for Investment, Excluding Loans Accounted for under ASC 310-30
OFG determined the allowance for loan and lease losses by portfolio segment, which consisted of mortgage loans, commercial loans, consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans were divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan modification programs and mortgage secured personal loans. Traditional mortgage loans included loans secured by a dwelling, fixed coupons and regular amortization schedules. Non-traditional mortgages included loans with interest-first amortization schedules and loans with balloon considerations as part of their terms. Mortgages in loan modification programs were loans that were being serviced under such programs. Mortgage loans were mainly equity lines of credit. The allowance factor on mortgage loans was impacted by the adjusted historical loss factors on the sub-segments and the qualitative factors described above and by delinquency buckets. The traditional mortgage loan portfolio was further segregated by vintages and then by delinquency buckets. The calculation of the loss factor used probability of default (“PD”) and loss given default (“LGD”) methodology. The PD resulted from a delinquency migration analysis and the LGD was based on the Bank’s historical loss experience.
Commercial loans: The commercial portfolio was segmented by business line (corporate, institutional, middle market, corporate retail, floor plan, and real estate), by collateral type (secured by real estate and other commercial and industrial assets), and loan grades. Quantitative components used a loss factor for the GVA of these loans established by considering OFG's historical loss experience of each segment adjusted for the loss realization period and the consideration of
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qualitative factors. The sum of the adjusted loss experience and the qualitative factors was the GVA factor used for the determination of the allowance for loan and lease losses on each segment.
Consumer loans: The consumer portfolio consisted of smaller retail loans such as retail credit cards, overdrafts, unsecured personal lines of credit, and personal unsecured loans. The allowance factor, which consisted of the adjusted historical loss factor and the qualitative factors, was calculated for each sub-class of loans by delinquency bucket.
Auto and leasing: The auto and leasing portfolio consisted of financing for the purchase of new or used motor vehicles for private or public use. The allowance factor was impacted by the adjusted historical loss factor and the qualitative factors. For the determination of the allowance factor, the portfolio was segmented by FICO score, which was updated on a quarterly basis and then by delinquency bucket.
OFG established its allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of the loan portfolio. This evaluation, which included a review of loans on which full collectability may not have been reasonably assured, considered, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warranted recognition in determining our allowance for loan losses. OFG continuously monitored and modified, if applicable, the level of the allowance for loan losses to ensure it was adequate to cover losses inherent in our loan portfolio.
Our allowance for loan losses consisted of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types.
When current information and events indicated that it was probable that we would be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $500 thousand, such loan was classified as impaired. Additionally, all loans modified in a TDR were considered impaired. The need for specific valuation allowances were determined for impaired loans and recorded as necessary. For impaired loans, we considered the fair value of the underlying collateral, less estimated costs to sell, if the loan was collateral dependent, or we used the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses were charged off immediately.
Loan loss ratios and loan grades, for commercial loans, were updated at least quarterly and were applied in the context of GAAP. Management used current available information in estimating possible loan and lease losses, factors beyond OFG’s control, such as those affecting general economic conditions, may have required future changes to the allowance.
Acquired Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30, our allowance for loan losses was estimated based upon our expected cash flows for these loans. To the extent that we experienced a deterioration in borrower credit quality resulting in a decrease in the net present value of our expected cash flows (which were used as a proxy to identify probable incurred losses) subsequent to the acquisition of the loans, an allowance for loan losses was established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC Subtopic 310-30 were not considered non-performing and continued to have an accretable yield as long as there was a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting were not reported as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 were recorded only to the extent that losses exceeded the non-accretable difference established with purchase accounting.
Troubled Debt Restructuring
A TDR is the restructuring of a receivable in which OFG, as creditor, grants a concession for legal or economic reasons due to the debtor’s financial difficulties. A concession is granted when, as a result of the restructuring, OFG does not expect to collect all amounts due, according to original contractual terms of the loan agreement. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses.
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To assess whether the debtor is having financial difficulties, OFG evaluates whether it is probable that the debtor will default on any of its debt in the foreseeable future.
Receivables that are restructured in a TDR are presumed to be impaired and are subject to a specific impairment-measurement method. If the repayment of the loan is expected to be provided solely by the underlying collateral and there are no other available sources of repayment, OFG considers the current value of that collateral in determining whether the principal will be paid. For non-collateral dependent loans, the specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate.
TDR loans are classified as either accrual or nonaccrual. An accruing loan that is modified in a TDR can remain in accrual status if, based on a current, well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before the modification. To restore a non-accruing loan that has been modified in a TDR to accrual status, the credit officer must perform a current, well-documented credit analysis supporting a return to accrual status based on the borrower's financial condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis must consider the borrower's sustained historical repayment performance for a reasonable period prior to the return-to-accrual date but may take into account payments made for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of repayment performance generally would be a minimum of six consecutive payments and would involve payments in the form of cash or cash equivalents.
OFG implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of Covid-19. The majority of OFG’s Covid-19 related loan modifications have not been considered TDRs as they represent short-term delay of payments or other insignificant modifications, whether under OFG’s regular loan modification assessments or the Interagency Statement guidance; or OFG 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, OFG 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 is re-evaluated after the deferral period ends. Loans are generally 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. OFG’s policy is to write-off all accrued interest on loans when they are placed on nonaccrual status.
Foreclosed Real Estate and Other Repossessed Property
Foreclosed real estate and other repossessed property are initially recorded at the fair value of the real estate or repossessed property less the cost of selling it at the date of foreclosure or repossession. At the time properties are acquired in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair value of the property is charged against the allowance for loan and lease losses. After foreclosure or repossession, these properties are carried at the lower of cost or fair value less estimated cost to sell based on recent appraised values or options to purchase the foreclosed or repossessed property. Any excess of the carrying value over the estimated fair value, less estimated costs to sell, is charged to non-interest expense. The costs and expenses associated to holding these properties in portfolio are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. OFG’s goodwill is not amortized to expense but is tested for impairment at least annually, and on a more frequent basis, if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.
A quantitative annual impairment test is not required if, based on a qualitative analysis, OFG determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. OFG performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing basis. OFG tests for impairment based on the allocation of goodwill and other assets and liabilities, as necessary, to defined reporting segments. A fair value is then determined for each reporting segment. If the fair values of the reporting segments exceed their book
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values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill.
Reporting segment valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting segments, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting segments and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying amount, an interim impairment test is required.
Other identifiable intangible assets with a finite useful life, mainly core deposits and customer relationships, are amortized using various methods over the periods benefited, which range from 3 to 10 years. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments on intangible assets with a finite useful life are evaluated under the guidance for impairment or disposal of long-lived assets.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method over the terms of the leases or estimated useful lives of the improvements, whichever is shorter.
Impairment of Long-Lived Assets
OFG periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition is made. If the sum of the future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. The amount of the impairment is the excess of the carrying amount over the fair value of the asset. As of December 31, 2021 and 2020, there was no indication of impairment as a result of such review.
Off-Balance Sheet Instruments
In the ordinary course of business, OFG enters into off-balance sheet instruments consisting of commitments to extend credit, further discussed in Note 25 – Commitments and Contingencies hereto. Such financial instruments are recorded in the financial statements when these are funded or related fees are incurred or received. OFG periodically evaluates the credit risks inherent in these commitments and establishes reserves for such risks if and when these are deemed necessary.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
OFG estimates the 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. Net adjustments to the reserve for unfunded commitments are included in the provision for credit losses in the Consolidated Statements of Operations.
Income Taxes
In preparing the consolidated financial statements, OFG is required to estimate income taxes. This involves an estimate of current income tax expense together with an assessment of deferred taxes resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require OFG to assume certain positions based on its interpretation of current tax laws and regulations. Changes in assumptions affecting estimates may be required in the future, and estimated tax assets or liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to OFG’s effective tax rate in the
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year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate and may require the use of cash in such year.
On December 30, 2019, Oriental Financial Services (“OFS”) was converted into a limited liability company (“LLC”), and on June 30, 2020, made the election to be treated as a partnership for income tax purposes which was effective on January 1, 2020. As such, OFS is currently a pass-through entity not subject to income taxes at the company level, and the parent will be subject to Puerto Rico income taxes on its distributable share of OFS taxable income under the partnership provisions of the PR Code. At the date of the election all tax attributes of OFS were also transferred to the parent. The same tax treatment applies to Oriental Insurance since its conversion to an LLC in December 2015, and tax election to be treated as a partnership effective on January 1, 2016. Pursuant to these elections OFG is required to pay income taxes on its distributable share of both entities; in the case of losses reported by any of the entities, the same may be offset with the taxable income of the other entity. However, OFG is not permitted to use its operating losses to offset the taxable income of its partnerships.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of OFG’s net deferred tax assets assumes that it will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, OFG may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations.
Management evaluates on a regular basis whether the deferred tax assets can be realized and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in OFG’s tax provision in the period of change.
In addition to valuation allowances, OFG establishes accruals for uncertain tax positions when, despite the belief that OFG’s tax return positions are fully supported, OFG believes that certain positions are likely to be challenged. The accruals for uncertain tax positions are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging legislation. The accruals for OFG’s uncertain tax positions are reflected as income tax payable as a component of accrued expenses and other liabilities. These accruals are reduced upon expiration of the applicable statute of limitations.
OFG follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
OFG’s policy is to include interest and penalties related to unrecognized income tax benefits within the provision for income taxes on the consolidated statements of operations.
OFG is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2017 to 2020, until the applicable statute of limitations expires. In addition, OFG’s US subsidiaries are potentially subject to income tax audits by the IRS for taxable years 2018 to 2020. Tax audits by their nature are often complex and can require several years to complete.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures.
Revenue-generating activities that are within the scope of ASC 606, which are presented in OFG's statement of operations as components of non-interest income are described in Note 28 – Banking and Financial Service Revenues.
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Stock-Based Compensation Plan
OFG’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and further amended in 2010 and 2013.
The purpose of the Omnibus Plan is to provide flexibility to OFG to attract, retain and motivate directors, officers, and key employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an “Award”) are intended to be based upon the recipient’s individual performance, corporate performance, level of responsibility and potential to make significant contributions to OFG. Generally, the Omnibus Plan will terminate as of (a) the date when no more of OFG’s shares of common stock are available for issuance under the Omnibus Plan or, (b) if earlier, the date the Omnibus Plan is terminated by OFG’s Board of Directors.
The Board’s Compensation Committee (the “Committee”), or such other committee as the Board may designate, has full authority to interpret and administer the Omnibus Plan in order to carry out its provisions and purposes. The Committee has the authority to determine those persons eligible to receive an Award and to establish the terms and conditions of any Award. The Committee may delegate, subject to such terms or conditions or guidelines as it shall determine, to any employee or group of employees any portion of its authority and powers under the Omnibus Plan with respect to participants who are not directors or executive officers subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Only the Committee may exercise authority in respect to Awards granted to such participants.
The expected term of stock options granted represents the period of time that such options are expected to be outstanding. Expected volatilities are based on historical volatility of OFG’s shares of common stock over the most recent period equal to the expected term of the stock options. For stock options issued during 2015, the expected volatilities are based on both historical and implied volatility of OFG’s shares of common stock.
OFG follows the fair value method of recording stock-based compensation. OFG used the modified prospective transition method, which requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award with the cost to be recognized over the service period. It applies to all awards unvested and granted after the effective date and awards modified, repurchased, or cancelled after that date.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and on derivative activities that qualify and are designated for cash flows hedge accounting, net of taxes, are reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income.
Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Lease Accounting
Right of use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any
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lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, and any impairment of the right-of-use asset. Variable lease payments are generally expensed as incurred and include certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
OFG’s leases do not contain residual value guarantees or material variable lease payments. All leases are classified as operating leases.
Subsequent Events
OFG has evaluated other events subsequent to the balance sheet date and prior to the filing of this annual report on Form 10-K for the year ended December 31, 2021, and has adjusted and disclosed those events that have occurred that would require adjustment or disclosure in the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior periods financial statements to conform to the current period presentation. For the year ended December 31, 2020, OFG recorded an immaterial correction in the statement of cash flows associated with the proceeds of mortgage loans held for sale. In accordance with Financial Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, OFG evaluated the materiality from quantitative and qualitative perspectives and concluded that were immaterial to OFG’s prior period interim and annual consolidated financial statements.
New Accounting Updates Adopted in 2021
Simplifying the Accounting for Income Taxes. On January 1, 2021, OFG adopted ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period tax allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Our adoption of this standard did not have an impact on our financial statements.
Investments—Equity Securities. On January 1, 2021, OFG adopted ASU 2020-01, which clarifies accounting for certain equity method investments (ASU 2020-01) clarifies the interactions between Topic 321 (equity securities), Topic 323 (equity method and joint ventures) and Topic 815 (derivatives and hedge accounting). The ASU addresses the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. Our adoption of this standard did not have an impact on our financial statements.
Reference Rate Reform. In March 2020, the FASB issued guidance within ASU 2020-4, which provides accounting relief from the future impact of the cessation of LIBOR by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated resulting from such changes provided certain criteria are met. OFG has identified its LIBOR exposure, mainly concentrated within the commercial loan portfolio. LIBOR-based contracts that will be impacted by the cessation of LIBOR have been under review to ensure they contain adequate fallback language. The Bank has also been proactively working to transition to alternative reference rates (“ARR”) and/or fallback language in both existing as well as new contracts to prepare for the cessation of LIBOR. Furthermore, management has established a LIBOR transition team to lead OFG in the execution of its project plan and is monitoring the development and adoption of SOFR alternatives as well as other credit sensitive ARR and their liquidity in the market. The company is also working towards business and system readiness to originate SOFR based loans. Notwithstanding these efforts, OFG expects to use the optional expedients provided by ASU 2020-04 for contracts left unmodified.
As of December 31, 2021, OFG’s total LIBOR-based asset and liabilities exposure represents 6.5% of total consolidated assets, which consists of $511.0 million in adjustable rate commercial loans, $39.6 million in mortgage loans tied to variable rates, $28.5 million in interest rate swaps, $25.9 million in interest rate caps and $36.1 million in subordinated
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
capital notes. The impact of the transition from LIBOR to an ARR on our loan portfolio, derivatives, asset-liability management, systems, processes, and business, is considered immaterial on our financial statements.
Issuer’s Accounting for Certain Modifications on Exchanges of Freestanding Equity-Classified Written Call Options. In May 2021, the FASB issued ASU 2021-04, which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. Our adoption of this standard did not have a material impact on our financial statements.
Certain Leases with Variable Lease Payments. In July 2021, the FASB issued guidance within ASU 2021-05, which amends the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both: the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3; and the lessor would have otherwise recognized a day-one loss. Our adoption of this standard did not have a material impact on our financial statements.
Amendments to SEC paragraphs pursuant to SEC final rules. On August 2021, OFG adopted ASU 2021-06, which updates certain SEC paragraphs in the Codification for two SEC final rules (No. 33-10786 and 33-10835) that address financial disclosures about acquired and disposed businesses and statistical disclosures for bank and savings and loan registrants. Our adoption of this standard did not have a material impact on our financial statements.
New Accounting Updates Not Yet Adopted
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. In August 2020, the FASB issued ASU 2020-06 to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption will be permitted, but no earlier than for fiscal years beginning after December 15, 2020. We will adopt this guidance when it becomes effective, in the first quarter of 2022, and the impact on our financial statements is not expected to be material.
Lessors—Certain Leases with Variable Lease Payments. FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05 to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC paragraphs 842-10-25-2 through 25-3; and (2) The lessor would have otherwise recognized a day-one loss. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. We will adopt this guidance when it becomes effective, in the first quarter of 2022, and the impact on our financial statements is not expected to be material.
FASB ASC 205, 942, and 946 – In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting for Contract Assets and Contract Liabilities From Contracts With Customers. In October 2021, the FASB issued ASU 2021-08 to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The new guidance will not have a material impact on the consolidated financial statements.
NOTE 2 – BUSINESS COMBINATIONS
On December 31, 2019, OFG purchased from the BNS all outstanding common stock of SBPR. Immediately following the closing, OFG merged SBPR with and into the Bank, with the Bank continuing as the surviving entity. As part of this transaction, the Bank also acquired the USVI 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). In addition, OFG acquired certain loans and assumed certain liabilities, from BNS’s Puerto Rico branch.
The assets acquired and liabilities assumed as of December 31, 2019 were presented at their estimated fair value. 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 year ended December 31, 2020, OFG finalized its fair value analysis of the acquired assets and liabilities assumed and recorded remeasurement adjustments of approximately $7.3 million to the preliminary estimated fair values of certain accrued interest receivables, 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.
Merger and Restructuring Charges
Merger and restructuring charges incurred during the years ended December 31, 2020 and 2019 were recorded in the consolidated statement of operations and included incremental costs to integrate the operations of OFG and its most recent acquisition. These charges represent costs associated with these activities and do not represent ongoing costs of the fully integrated combined organization.
The following table presents severance and employee charges, systems integrations charges, branch consolidation, and other merger and restructuring charges related to the Scotiabank Acquisition, for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2020 | | 2019 |
| | (In thousands) |
Severance and employee-related charges | | | $ | 220 | | | $ | 13,323 | |
Professional services and system integrations | | | 9,973 | | | 9,718 | |
Branch consolidation | | | 3,707 | | | — | |
Other | | | 2,183 | | | 1,013 | |
Total merger and restructuring charges | | | $ | 16,083 | | | $ | 24,054 | |
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.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the changes in restructuring reserves for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (In thousands) |
Balance at the beginning of the year | | $ | 15,129 | | | $ | 17,491 | | | $ | — | |
Merger and restructuring charges | | — | | | 16,083 | | | 24,054 | |
Cash payments | | (15,129) | | | (18,445) | | | (6,563) | |
Balance at the end of the year | | $ | — | | | $ | 15,129 | | | $ | 17,491 | |
Payments under merger and restructuring reserves associated with the Scotiabank Acquisition continued into 2021 but they were not material and were accounted under applicable accounting guidance to the cost being incurred.
NOTE 3 – RESTRICTED CASH
The following table includes the composition of OFG’s restricted cash:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Cash pledged as collateral to other financial institutions to secure: | | | |
Regulatory requirements | $ | — | | | $ | 325 | |
Obligations under agreement of loans sold with recourse | 175 | | | 1,050 | |
| $ | 175 | | | $ | 1,375 | |
At December 31, 2020, cash of $325 thousand was held as the legal reserve required by the Puerto Rico’s Office of the Commissioner of Financial Institutions (“OCFI”) in connection with an international banking entity (“IBE”) unit license acquired in the Scotiabank Acquisition. This cash was released during the year ended December 31, 2021, as a result of the cancellation of this IBE license.
OFG has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At December 31, 2021 and 2020, OFG delivered as collateral cash amounting to approximately $175 thousand and $1.1 million, respectively.
The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered December 31, 2021 was $456.5 million (December 31, 2020 - $408.5 million). At December 31, 2021 and 2020, 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
OFG considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At December 31, 2021 and 2020, money market instruments included as part of cash and cash equivalents amounted to $9.0 million and $11.9 million, respectively.
Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, weighted average yield and contractual maturities of the securities owned by OFG at December 31, 2021 and 2020 were as follows:
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Weighted Average Yield |
| (In thousands) |
Available-for-sale | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | |
FNMA and FHLMC certificates | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Due from 5 to 10 years | $ | 90,560 | | | $ | 2,502 | | | $ | — | | | $ | 93,062 | | | 1.94 | % |
Due after 10 years | 93,440 | | | — | | | 3,200 | | | $ | 90,240 | | | 1.37 | % |
Total FNMA and FHLMC certificates | 184,000 | | | 2,502 | | | 3,200 | | | 183,302 | | | 1.65 | % |
GNMA Securities | | | | | | | | | |
| | | | | | | | | |
Due from 1 to 5 years | 10,536 | | | 233 | | | 1 | | | 10,768 | | | 1.66 | % |
Due from 5 to 10 years | 26,419 | | | 556 | | | — | | | 26,975 | | | 1.80 | % |
Due after 10 years | 244,106 | | | 6,927 | | | 198 | | | 250,835 | | | 2.40 | % |
Total GNMA certificates | 281,061 | | | 7,716 | | | 199 | | | 288,578 | | | 2.32 | % |
CMOs issued by US government-sponsored agencies | | | | | | | | | |
| | | | | | | | | |
Due from 1 to 5 years | 1,788 | | | 22 | | | — | | | 1,810 | | | 1.70 | % |
Due from 5 to 10 years | 20,705 | | | 299 | | | — | | | 21,004 | | | 1.81 | % |
Due after 10 years | 1,601 | | | 16 | | | 1 | | | 1,616 | | | 4.24 | % |
Total CMOs issued by US government-sponsored agencies | 24,094 | | | 337 | | | 1 | | | 24,430 | | | 1.96 | % |
Total mortgage-backed securities | 489,155 | | | 10,555 | | | 3,400 | | | 496,310 | | | 2.05 | % |
Investment securities | | | | | | | | | |
US Treasury securities | | | | | | | | | |
Due less than 1 year | 10,737 | | | 88 | | | — | | | 10,825 | | | 1.48 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total US Treasury Securities | 10,737 | | | 88 | | | — | | | 10,825 | | | 1.48 | % |
Obligations of US government-sponsored agencies | | | | | | | | | |
Due less than 1 year | 1,182 | | | 1 | | | — | | | 1,183 | | | 1.40 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total Obligations of US government-sponsored agencies | 1,182 | | | 1 | | | — | | | 1,183 | | | 1.40 | % |
Other debt securities | | | | | | | | | |
Due less than 1 year | 500 | | | — | | | — | | | 500 | | | 0.57 | % |
Due from 1 to 5 years | 1,847 | | | 48 | | | — | | | 1,895 | | | 5.43 | % |
| | | | | | | | | |
| | | | | | | | | |
Total Other debt securities | 2,347 | | | 48 | | | — | | | 2,395 | | | 4.39 | % |
Total investment securities | 14,266 | | | 137 | | | — | | | 14,403 | | | 1.95 | % |
Total securities available for sale | $ | 503,421 | | | $ | 10,692 | | | $ | 3,400 | | | $ | 510,713 | | | 2.05 | % |
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Weighted Average Yield |
| (In thousands) |
Held-to-maturity | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | |
FNMA and FHLMC certificates | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Due after 10 years | $ | 367,507 | | | $ | — | | | $ | 3,854 | | | $ | 363,653 | | | 1.71 | % |
| | | | | | | | | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Weighted Average Yield |
| (In thousands) |
Available-for-sale | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | |
FNMA and FHLMC certificates | | | | | | | | | |
Due less than 1 year | $ | 348 | | | $ | 16 | | | $ | — | | | $ | 364 | | | 1.77 | % |
| | | | | | | | | |
Due from 5 to 10 years | 96,902 | | | 3,741 | | | — | | | 100,643 | | | 2.00 | % |
Due after 10 years | 108,945 | | | 1,029 | | | 32 | | | 109,942 | | | 1.58 | % |
Total FNMA and FHLMC certificates | 206,195 | | | 4,786 | | | 32 | | | 210,949 | | | 1.78 | % |
GNMA Securities | | | | | | | | | |
| | | | | | | | | |
Due from 1 to 5 years | 469 | | | 3 | | | — | | | 472 | | | 1.83 | % |
Due from 5 to 10 years | 58,615 | | | 1,466 | | | — | | | 60,081 | | | 1.80 | % |
Due after 10 years | 115,388 | | | 7,009 | | | 178 | | | 122,219 | | | 2.42 | % |
Total GNMA certificates | 174,472 | | | 8,478 | | | 178 | | | 182,772 | | | 2.21 | % |
CMOs issued by US government-sponsored agencies | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Due from 5 to 10 years | 32,220 | | | 793 | | | — | | | 33,013 | | | 1.78 | % |
Due after 10 years | 6,089 | | | 112 | | | — | | | 6,201 | | | 2.95 | % |
Total CMOs issued by US government-sponsored agencies | 38,309 | | | 905 | | | — | | | 39,214 | | | 1.96 | % |
Total mortgage-backed securities | 418,976 | | | 14,169 | | | 210 | | | 432,935 | | | 1.97 | % |
Investment securities | | | | | | | | | |
US Treasury securities | | | | | | | | | |
Due less than 1 year | 735 | | | — | | | — | | | 735 | | | 0.10 | % |
Due from 1 to 5 years | 10,005 | | | 243 | | | — | | | 10,248 | | | 1.59 | % |
| | | | | | | | | |
| | | | | | | | | |
Total US Treasury Securities | 10,740 | | | 243 | | | — | | | 10,983 | | | 1.49 | % |
Obligations of US government-sponsored agencies | | | | | | | | | |
| | | | | | | | | |
Due from 1 to 5 years | 1,585 | | | 21 | | | — | | | 1,606 | | | 1.39 | % |
| | | | | | | | | |
| | | | | | | | | |
Total Obligations of US government-sponsored agencies | 1,585 | | | 21 | | | — | | | 1,606 | | | 1.39 | % |
Other debt securities | | | | | | | | | |
Due less than 1 year | 251 | | | — | | | — | | | 251 | | | 0.65 | % |
| | | | | | | | | |
Due from 5 to 10 years | 624 | | | 39 | | | — | | | 663 | | | 2.97 | % |
| | | | | | | | | |
Total Other debt securities | 875 | | | 39 | | | — | | | 914 | | | 2.31 | % |
Total investment securities | 13,200 | | | 303 | | | — | | | 13,503 | | | 1.53 | % |
Total securities available for sale | $ | 432,176 | | | $ | 14,472 | | | $ | 210 | | | $ | 446,438 | | | 1.96 | % |
| | | | | | | | | |
| | | | | | | | | |
| |
| | | | | | | | | |
| |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Investment securities as of December 31, 2021 include $145.6 million pledged to secure government deposits, derivatives and regulatory collateral that the secured parties are not permitted to sell or repledge the collateral, of which $143.8 million serve as collateral for public funds. Investment securities as of December 31, 2020 include $148.8 million pledged to secure government deposits, derivatives and regulatory collateral that the secured parties are not permitted to sell or repledge the collateral, of which $146.4 million serve as collateral for public funds. At December 31, 2020 OFG did not have securities held to maturity.
The weighted average yield on debt securities available-for-sale is based on amortized cost and does not give effect to changes in fair value. Weighted average yields on tax-exempt obligations have been computed on a on a fully taxable equivalent basis.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
At December 31, 2021 and 2020, most securities held by OFG are issued by U.S. government entities and agencies that have a zero-credit loss assumption.
At both December 31, 2021 and 2020, the Bank’s international banking entities held short-term US Treasury 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 without the prior written approval of the OCFI.
During the years ended December 31, 2021, 2020, and 2019, OFG retained securitized GNMA pools totaling $149.1 million, $90.1 million, and $62.8 million amortized cost, respectively, at a yield of 2.45%, 2.48%, and 3.23%, from its own originations.
During the year ended December 31, 2021, OFG sold $2.2 million available-for-sale mortgage-backed securities and recognized a $19 thousand gain in the sale. During the year ended December 31, 2020, OFG sold $316.3 million available-for-sale mortgage-backed securities and recognized a $4.7 million gain in the sale. During the year ended December 31, 2019, OFG sold $672.2 million available-for-sale mortgage-backed securities and recognized a $8.3 million gain in the sale.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
Description | | Sale Price | | Book Value at Sale | | Gross Gains | | Gross Losses |
| | (In thousands) |
Sale of securities available-for-sale | | | | | | | | |
Mortgage-backed securities | | | | | | | | |
| | | | | | | | |
GNMA certificates | | 2,175 | | | 2,156 | | | 19 | | | — | |
Total | | $ | 2,175 | | | $ | 2,156 | | | $ | 19 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
Description | | Sale Price | | Book Value 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 | | | $ | — | |
GNMA certificates | | 91,413 | | | 89,043 | | | 2,370 | | | — | |
Total | | $ | 320,984 | | | $ | 316,256 | | | $ | 4,728 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
Description | | Sale Price | | Book Value at Sale | | Gross Gains | | Gross Losses |
| | (In thousands) |
Sale of securities available-for-sale | | | | | | | | |
FNMA and FHLMC certificates | | 451,081 | | | 447,305 | | | 3,776 | | | — | |
GNMA certificates | | 229,385 | | | 224,887 | | | 4,498 | | | — | |
Total mortgage-backed securities | | $ | 680,466 | | | $ | 672,192 | | | $ | 8,274 | | | $ | — | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table show OFG’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at December 31, 2021 and 2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months |
| Amortized Cost | | Unrealized Loss | | Fair Value |
| (In thousands) |
Securities available-for-sale | | | | | |
CMOs issued by US Government-sponsored agencies | 500 | | | 1 | | | 499 | |
FNMA and FHLMC certificates | 93,440 | | | 3,200 | | | 90,240 | |
GNMA certificates | 5,022 | | | 199 | | | 4,823 | |
| | | | | |
| $ | 98,962 | | | $ | 3,400 | | | $ | 95,562 | |
| | | | | |
Held-to-maturity | | | | | |
FNMA and FHLMC certificates | $ | 367,507 | | | $ | 3,854 | | | $ | 363,653 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less than 12 months |
| Amortized Cost | | Unrealized Loss | | Fair Value |
| (In thousands) |
Securities available-for-sale | | | | | |
| | | | | |
FNMA and FHLMC certificates | 34,628 | | | 32 | | | 34,596 | |
GNMA certificates | 5,104 | | | 178 | | | 4,926 | |
| | | | | |
| $ | 39,732 | | | $ | 210 | | | $ | 39,522 | |
| | | | | |
| | | | | |
| | | | | |
OFG had no investment securities in a continuous loss position for 12 months or more at December 31, 2021 and 2020.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 5 - PLEDGED ASSETS
The following table shows a summary of pledged and not pledged assets at December 31, 2021 and 2020. Investment securities available for sale are presented at fair value, and investment securities held to maturity, residential mortgage loans, commercial loans and leases are presented at amortized cost:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Pledged investment securities to secure: | | | |
| | | |
Derivatives | $ | 1,678 | | | $ | 2,351 | |
Bond for the Bank's trust operations | 105 | | | 105 | |
Puerto Rico public fund deposits | 143,775 | | | 146,381 | |
Total pledged investment securities | 145,559 | | | 148,837 | |
Pledged residential mortgage loans to secure: | | | |
Advances from the Federal Home Loan Bank | 550,209 | | | 699,091 | |
Pledged commercial loans to secure: | | | |
Advances from the Federal Home Loan Bank | 398,754 | | | 460,149 | |
Federal Reserve Bank Credit Facility | 47,239 | | | 48,089 | |
Puerto Rico public fund deposits | 85,148 | | | 96,273 | |
| 531,141 | | | 604,511 | |
Pledged auto loans and leases to secure: | | | |
Federal Reserve Bank Credit Facility | 1,138,126 | | | 1,049,477 | |
Total pledged assets | $ | 2,365,035 | | | $ | 2,501,916 | |
Financial assets not pledged: | | | |
Investment securities | $ | 732,661 | | | $ | 297,601 | |
Residential mortgage loans | 1,408,158 | | | 1,625,938 | |
Commercial loans | 1,879,755 | | | 1,799,780 | |
Consumer loans | 409,675 | | | 414,946 | |
Auto loans and leases | 568,184 | | | 512,325 | |
Total assets not pledged | $ | 4,998,432 | | | $ | 4,650,590 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6 - LOANS
OFG’s loan portfolio is composed of four segments, commercial, mortgage, consumer, and auto loans and leases. Loans are further segregated into classes which OFG uses when assessing and monitoring the risk and performance of the portfolio.
The composition of the amortized cost basis of OFG’s loan portfolio at December 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Non-PCD | | PCD | | Total | | Non-PCD | | PCD | | Total |
| (In thousands) |
Commercial loans: | | | | | | | | | | | |
Commercial secured by real estate | $ | 883,994 | | | $ | 176,186 | | | $ | 1,060,180 | | | $ | 807,284 | | | $ | 243,229 | | | $ | 1,050,513 | |
Other commercial and industrial | 759,172 | | | 28,149 | | | 787,321 | | | 647,444 | | | 39,931 | | | 687,375 | |
Other commercial and industrial - Paycheck Protection Program (PPP Loans) | 86,889 | | | — | | | 86,889 | | | 289,218 | | | — | | | 289,218 | |
US commercial loans | 444,940 | | | — | | | 444,940 | | | 374,904 | | | — | | | 374,904 | |
| 2,174,995 | | | 204,335 | | | 2,379,330 | | | 2,118,850 | | | 283,160 | | | 2,402,010 | |
Mortgage | 718,848 | | | 1,188,423 | | | 1,907,271 | | | 847,102 | | | 1,459,932 | | | 2,307,034 | |
Consumer: | | | | | | | | | | | |
Personal loans | 346,859 | | | 546 | | | 347,405 | | | 313,257 | | | 1,043 | | | 314,300 | |
Credit lines | 14,775 | | | 370 | | | 15,145 | | | 20,146 | | | 351 | | | 20,497 | |
Credit cards | 46,795 | | | — | | | 46,795 | | | 56,185 | | | — | | | 56,185 | |
Overdraft | 330 | | | — | | | 330 | | | 305 | | | — | | | 305 | |
| 408,759 | | | 916 | | | 409,675 | | | 389,893 | | | 1,394 | | | 391,287 | |
Auto and leasing | 1,693,029 | | | 13,281 | | | 1,706,310 | | | 1,534,269 | | | 27,533 | | | 1,561,802 | |
| 4,995,631 | | | 1,406,955 | | | 6,402,586 | | | 4,890,114 | | | 1,772,019 | | | 6,662,133 | |
Allowance for credit losses | (132,065) | | | (23,872) | | | (155,937) | | | (161,015) | | | (43,794) | | | (204,809) | |
Total loans held for investment, net | 4,863,566 | | | 1,383,083 | | | 6,246,649 | | | 4,729,099 | | | 1,728,225 | | | 6,457,324 | |
Mortgage loans held for sale | 51,096 | | | — | | | 51,096 | | | 41,654 | | | — | | | 41,654 | |
Other loans held for sale | 31,566 | | | — | | | 31,566 | | | 2,281 | | | — | | | 2,281 | |
Total loans held for sale | 82,662 | | | — | | | 82,662 | | | 43,935 | | | — | | | 43,935 | |
Total loans, net | $ | 4,946,228 | | | $ | 1,383,083 | | | $ | 6,329,311 | | | $ | 4,773,034 | | | $ | 1,728,225 | | | $ | 6,501,259 | |
During 2021, OFG sold $4.8 million past due loans, including $4.2 million of past due commercial loans and $0.6 million of past due mortgage loans. In addition, OFG transferred to held for sale past due residential mortgage loans with carrying balance of $39.8 million and a PCD commercial loan with carrying balance of $20.9 million. At December 31, 2021, the mortgage loans transferred to held for sale referred to before had a reporting balance of $22.3 million and the commercial loan had a reporting balance of $9.7 million.
At December 31, 2021 and 2020, OFG had carrying balances of $87.3 million and $99.1 million, respectively, in loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, as part of the commercial loan segment. The Bank’s loans to the Puerto Rico government amounting to $86.2 million and $98.0 million at December 31, 2021 and 2020, 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. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The tables below present the aging of the amortized cost of loans held for investment at December 31, 2021 and 2020, by class of loans. Mortgage loans past due include $14.5 million and $56.2 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90+ Days Past Due | | Total Past Due | | Current | | Total Loans | | Loans 90+ Days Past Due and Still Accruing |
| (In thousands) |
Commercial | | | | | | | | | | | | | |
Commercial secured by real estate | $ | 2,210 | | | $ | 102 | | | $ | 8,446 | | | $ | 10,758 | | | $ | 873,236 | | | $ | 883,994 | | | $ | — | |
Other commercial and industrial | 1,886 | | | 538 | | | 946 | | | 3,370 | | | 842,691 | | | 846,061 | | | — | |
US commercial loans | — | | | — | | | — | | | — | | | 444,940 | | | 444,940 | | | — | |
| 4,096 | | | 640 | | | 9,392 | | | 14,128 | | | 2,160,867 | | | 2,174,995 | | | — | |
Mortgage | 8,704 | | | 7,855 | | | 43,468 | | | 60,027 | | | 658,821 | | | 718,848 | | | 2,346 | |
Consumer | | | | | | | | | | | | | |
Personal loans | 2,382 | | | 1,131 | | | 1,116 | | | 4,629 | | | 342,230 | | | 346,859 | | | — | |
Credit lines | 531 | | | 141 | | | 227 | | | 899 | | | 13,876 | | | 14,775 | | | — | |
Credit cards | 610 | | | 336 | | | 631 | | | 1,577 | | | 45,218 | | | 46,795 | | | — | |
Overdraft | 130 | | | 14 | | | — | | | 144 | | | 186 | | | 330 | | | — | |
| 3,653 | | | 1,622 | | | 1,974 | | | 7,249 | | | 401,510 | | | 408,759 | | | — | |
Auto and leasing | 60,038 | | | 30,234 | | | 13,461 | | | 103,733 | | | 1,589,296 | | | 1,693,029 | | | — | |
Total loans | $ | 76,491 | | | $ | 40,351 | | | $ | 68,295 | | | $ | 185,137 | | | $ | 4,810,494 | | | $ | 4,995,631 | | | $ | 2,346 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| 30-59 Day Past Due | | 60-89 Days Past Due | | 90+ Days Past Due | | Total Past Due | | Current | | Total Loans | | Loans 90+ Days Past Due and Still Accruing |
| (In thousands) |
Commercial | | | | | | | | | | | | | |
Commercial secured by real estate | $ | 2,781 | | | $ | 750 | | | $ | 17,862 | | | $ | 21,393 | | | $ | 785,891 | | | $ | 807,284 | | | $ | — | |
Other commercial and industrial | 1,674 | | | 234 | | | 4,695 | | | 6,603 | | | 930,059 | | | 936,662 | | | — | |
US commercial loans | 2,604 | | | — | | | — | | | 2,604 | | | 372,300 | | | 374,904 | | | — | |
| 7,059 | | | 984 | | | 22,557 | | | 30,600 | | | 2,088,250 | | | 2,118,850 | | | — | |
Mortgage | 8,475 | | | 15,100 | | | 102,291 | | | 125,866 | | | 721,236 | | | 847,102 | | | 3,974 | |
Consumer | | | | | | | | | | | | | |
Personal loans | 4,784 | | | 2,515 | | | 2,062 | | | 9,361 | | | 303,896 | | | 313,257 | | | — | |
Credit lines | 1,046 | | | 329 | | | 506 | | | 1,881 | | | 18,265 | | | 20,146 | | | — | |
Credit cards | 1,357 | | | 824 | | | 1,585 | | | 3,766 | | | 52,419 | | | 56,185 | | | — | |
Overdraft | 138 | | | — | | | — | | | 138 | | | 167 | | | 305 | | | — | |
| 7,325 | | | 3,668 | | | 4,153 | | | 15,146 | | | 374,747 | | | 389,893 | | | — | |
Auto and leasing | 57,176 | | | 31,181 | | | 20,485 | | | 108,842 | | | 1,425,427 | | | 1,534,269 | | | — | |
Total loans | $ | 80,035 | | | $ | 50,933 | | | $ | 149,486 | | | $ | 280,454 | | | $ | 4,609,660 | | | $ | 4,890,114 | | | $ | 3,974 | |
Upon adoption of CECL, OFG 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 tables above.
Before the CECL implementation, certain acquired loans were accounted for by OFG in accordance with ASC 310-30. The following table describes the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Mortgage | | Commercial | | Auto and Leasing | | Consumer | | Total |
| (In thousands) |
Accretable Yield Activity: | | | | | | | | | |
Balance at beginning of year | $ | 232,199 | | | $ | 36,508 | | | $ | 243 | | | $ | 560 | | | $ | 269,510 | |
Accretion | (23,871) | | | (10,312) | | | (430) | | | (739) | | | (35,352) | |
Change in expected cash flows | (212) | | | 23,080 | | | (19) | | | 739 | | | 23,588 | |
Transfer from (to) non-accretable discount | (12,033) | | | (30,653) | | | 253 | | | (427) | | | (42,860) | |
Balance at end of year | $ | 196,083 | | | $ | 18,623 | | | $ | 47 | | | $ | 133 | | | $ | 214,886 | |
| | | | | | | | | |
Non-Accretable Discount Activity: | | | | | | | | | |
Balance at beginning of year | $ | 291,887 | | | $ | 10,346 | | | $ | 24,245 | | | $ | 18,945 | | | $ | 345,423 | |
Change in actual and expected losses | (27,741) | | | (19,295) | | | (169) | | | (612) | | | (47,817) | |
Transfer (to) from accretable yield | 12,033 | | | 30,653 | | | (253) | | | 427 | | | 42,860 | |
Balance at end of year | $ | 276,179 | | | $ | 21,704 | | | $ | 23,823 | | | $ | 18,760 | | | $ | 340,466 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table describes the accretable yield and non-accretable discount activity of acquired Eurobank loans for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Mortgage | | Commercial | | Auto and Leasing | | Consumer | | Total |
| (In thousands) |
Accretable Yield Activity: | | | | | | | | | |
Balance at beginning of year | $ | 38,389 | | | $ | 3,310 | | | $ | — | | | $ | — | | | $ | 41,699 | |
Accretion | (4,999) | | | (4,611) | | | (14) | | | (164) | | | (9,788) | |
Change in expected cash flows | 2,578 | | | 2,270 | | | (145) | | | 273 | | | 4,976 | |
Transfer from (to) non-accretable discount | (1,947) | | | (549) | | | 159 | | | (109) | | | (2,446) | |
Balance at end of year | $ | 34,021 | | | $ | 420 | | | $ | — | | | $ | — | | | $ | 34,441 | |
| | | | | | | | | |
Non-Accretable Discount Activity: | | | | | | | | | |
Balance at beginning of year | $ | 2,826 | | | $ | — | | | $ | — | | | $ | 133 | | | $ | 2,959 | |
Change in actual and expected losses | (3,051) | | | 1,928 | | | 159 | | | (156) | | | (1,120) | |
Transfer (to) from accretable yield | 1,947 | | | 549 | | | (159) | | | 109 | | | 2,446 | |
Balance at end of year | $ | 1,722 | | | $ | 2,477 | | | $ | — | | | $ | 86 | | | $ | 4,285 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Non-accrual Loans
The following table presents the amortized cost basis of loans on nonaccrual status as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Nonaccrual with Allowance for Credit Loss | | Nonaccrual with no Allowance for Credit Loss | | Total | | Nonaccrual with Allowance for Credit Loss | | Nonaccrual with no Allowance for Credit Loss | | Total |
| (In thousands) |
Non-PCD: | | | | | | | | | | | |
Commercial | | | | | | | | | | | |
Commercial secured by real estate | $ | 16,299 | | | $ | 19,538 | | | $ | 35,837 | | | $ | 15,225 | | | $ | 21,462 | | | $ | 36,687 | |
Other commercial and industrial | 1,284 | | | 483 | | | 1,767 | | | 2,138 | | | 3,174 | | | 5,312 | |
| 17,583 | | | 20,021 | | | 37,604 | | | 17,363 | | | 24,636 | | | 41,999 | |
Mortgage | 16,428 | | | 12,840 | | | 29,268 | | | 25,683 | | | 17,747 | | | 43,430 | |
Consumer | | | | | | | | | | | |
Personal loans | 1,143 | | | 302 | | | 1,445 | | | 1,752 | | | 377 | | | 2,129 | |
Personal lines of credit | 226 | | | — | | | 226 | | | 509 | | | — | | | 509 | |
Credit cards | 632 | | | — | | | 632 | | | 1,586 | | | — | | | 1,586 | |
| 2,001 | | | 302 | | | 2,303 | | | 3,847 | | | 377 | | | 4,224 | |
Auto and leasing | 19,827 | | | 2 | | | 19,829 | | | 20,766 | | | — | | | 20,766 | |
Total | $ | 55,839 | | | $ | 33,165 | | | $ | 89,004 | | | $ | 67,659 | | | $ | 42,760 | | | $ | 110,419 | |
| | | | | | | | | | | |
PCD: | | | | | | | | | | | |
Commercial | | | | | | | | | | | |
Commercial secured by real estate | $ | 5,205 | | | $ | 6,198 | | | $ | 11,403 | | | $ | 31,338 | | | $ | 4,031 | | | $ | 35,369 | |
Other commercial and industrial | 1,102 | | | 40 | | | 1,142 | | | 1,102 | | | — | | | 1,102 | |
| 6,307 | | | 6,238 | | | 12,545 | | | 32,440 | | | 4,031 | | | 36,471 | |
Mortgage | 334 | | | — | | | 334 | | | 1,003 | | | — | | | 1,003 | |
Consumer | | | | | | | | | | | |
Personal loans | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| — | | | — | | | — | | | 1 | | | — | | | 1 | |
Total | $ | 6,641 | | | $ | 6,238 | | | $ | 12,879 | | | $ | 33,444 | | | $ | 4,031 | | | $ | 37,475 | |
Total non-accrual loans | $ | 62,480 | | | $ | 39,403 | | | $ | 101,883 | | | $ | 101,103 | | | $ | 46,791 | | | $ | 147,894 | |
The determination of nonaccrual or accrual status of PCD loans is made at the pool level, not the individual loan level.
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 December 31, 2021 and 2020, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $125.9 million and $113.9 million, respectively, as they were performing under their new terms.
Modifications
OFG 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.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure. The amount of outstanding commitments to lend additional funds to commercial borrowers whose terms have been modified in TDRs amounted to $3.7 million and $7.7 million at December 31, 2021 and 2020, respectively.
The following table presents the troubled-debt restructurings in all loan portfolios as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Accruing | | Non-accruing | | Total | | Related Allowance | | Accruing | | Non-accruing | | Total | | Related Allowance |
| (In thousands) |
Commercial loans: | | | | | | | | | | | | | | | |
Commercial secured by real estate | $ | 10,981 | | | $ | 14,444 | | | $ | 25,425 | | | $ | 202 | | | $ | 10,047 | | | $ | 16,609 | | | $ | 26,656 | | | $ | 223 | |
Other commercial and industrial | 2,785 | | | 473 | | | 3,258 | | | 41 | | | 3,872 | | | 375 | | | 4,247 | | | 59 | |
| | | | | | | | | | | | | | | |
US commercial loans | 7,156 | | | — | | | 7,156 | | | 126 | | | 7,157 | | | — | | | 7,157 | | | 345 | |
| 20,922 | | | 14,917 | | | 35,839 | | | 369 | | | 21,076 | | | 16,984 | | | 38,060 | | | 627 | |
Mortgage | 101,487 | | | 9,475 | | | 110,962 | | | 3,867 | | | 87,539 | | | 11,202 | | | 98,741 | | | 4,882 | |
Consumer: | | | | | | | | | | | | | | | |
Personal loans | 3,275 | | | 139 | | | 3,414 | | | 159 | | | 4,944 | | | 67 | | | 5,011 | | | 257 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Auto and leasing | 203 | | | 8 | | | 211 | | | 11 | | | 331 | | | 44 | | | 375 | | | 23 | |
Total loans | $ | 125,887 | | | $ | 24,539 | | | $ | 150,426 | | | $ | 4,406 | | | $ | 113,890 | | | $ | 28,297 | | | $ | 142,187 | | | $ | 5,789 | |
| | | | | | | | | | | | | | | |
The following tables present the troubled-debt restructurings by loan portfolios and modification type as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Reduction in interest rate | | Maturity or term extension | | Combination of reduction in interest rate and extension of maturity | | Forbearance | | Total |
| (In thousands) |
Commercial loans: | | | | | | | | | |
Commercial secured by real estate | $ | 8,461 | | | $ | 1,227 | | | $ | 12,401 | | | $ | 3,336 | | | $ | 25,425 | |
Other commercial and industrial | 723 | | | 1,985 | | | 522 | | | 28 | | | 3,258 | |
| | | | | | | | | |
US commercial loans | 7,156 | | | — | | | — | | | — | | | 7,156 | |
| 16,340 | | | 3,212 | | | 12,923 | | | 3,364 | | | 35,839 | |
Mortgage | 37,307 | | | 6,796 | | | 32,456 | | | 34,403 | | | 110,962 | |
Consumer: | | | | | | | | | |
Personal loans | 1,496 | | | 287 | | | 1,430 | | | 201 | | | 3,414 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Auto and leasing | 74 | | | — | | | 28 | | | 109 | | | 211 | |
Total loans | $ | 55,217 | | | $ | 10,295 | | | $ | 46,837 | | | $ | 38,077 | | | $ | 150,426 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Reduction in interest rate | | Maturity or term extension | | Combination of reduction in interest rate and extension of maturity | | Forbearance | | Total |
| (In thousands) |
Commercial loans: | | | | | | | | | |
Commercial secured by real estate | $ | 740 | | | $ | 3,926 | | | $ | 21,990 | | | $ | — | | | $ | 26,656 | |
Other commercial and industrial | 718 | | | 2,960 | | | 569 | | | — | | | 4,247 | |
| | | | | | | | | |
US commercial loans | 7,157 | | | — | | | — | | | — | | | 7,157 | |
| 8,615 | | | 6,886 | | | 22,559 | | | — | | | 38,060 | |
Mortgage | 27,593 | | | 6,271 | | | 29,734 | | | 35,143 | | | 98,741 | |
Consumer: | | | | | | | | | |
Personal loans | 2,315 | | | 407 | | | 1,896 | | | 393 | | | 5,011 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Auto and leasing | 38 | | | — | | | 38 | | | 299 | | | 375 | |
Total loans | $ | 38,561 | | | $ | 13,564 | | | $ | 54,227 | | | $ | 35,835 | | | $ | 142,187 | |
TDRs disclosed above were not related to Covid-19 modifications. 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 implementation of the modification program, and the borrowers meet other applicable criteria. As of December 31, 2021 and 2020 there were $28.0 million and $95.7 million, respectively, of loans deferred as a result from the Covid-19 pandemic that were not classified as a TDR, which consists of commercial loans in the hospitality industry and FHA and VA insured mortgage loans.
At December 31, 2021 and 2020, TDR mortgage loans include $40.8 million and $22.1 million, respectively, of government guaranteed loans (e.g. FHA/VA).
Upon adoption of CECL, OFG 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 tables.
Loan modifications that are considered TDR loans completed during the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| 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 | 160 | | $ | 20,077 | | | 4.33 | % | | 323 | | $ | 20,241 | | | 3.47 | % | | 345 |
Commercial | 7 | | 10,093 | | | 5.50 | % | | 86 | | 9,979 | | | 4.48 | % | | 60 |
Consumer | 17 | | 294 | | | 13.72 | % | | 69 | | 295 | | | 10.12 | % | | 78 |
Auto and leasing | 9 | | 148 | | | 8.70 | % | | 72 | | 148 | | | 9.35 | % | | 49 |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 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 | 88 | | $ | 11,081 | | | 4.70 | % | | 332 | | $ | 10,151 | | | 4.13 | % | | 327 |
Commercial | 8 | | 14,896 | | | 5.45 | % | | 63 | | 14,896 | | | 4.36 | % | | 77 |
Consumer | 23 | | 349 | | | 14.11 | % | | 64 | | 391 | | | 10.57 | % | | 76 |
Auto and leasing | 31 | | 217 | | | 10.88 | % | | 74 | | 219 | | | 11.02 | % | | 71 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 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 | 148 | | $ | 19,130 | | | 5.85 | % | | 376 | | $ | 17,991 | | | 5.09 | % | | 345 |
Commercial | 5 | | 2,070 | | | 7.23 | % | | 56 | | 2,070 | | | 6.05 | % | | 67 |
Consumer | 370 | | 5,357 | | | 15.69 | % | | 66 | | 5,398 | | | 11.50 | % | | 74 |
Auto and leasing | 22 | | 319 | | | 7.29 | % | | 70 | | 326 | | | 8.97 | % | | 44 |
The following table presents troubled-debt restructurings for which there was a payment default during the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| (Dollars in thousands) |
Mortgage | 19 | | | $ | 2,488 | | | 9 | | | $ | 1,345 | | | 29 | | | $ | 3,597 | |
| | | | | | | | | | | |
Consumer | 6 | | | $ | 76 | | | 1 | | | $ | 2 | | | 77 | | | $ | 1,118 | |
Auto and leasing | 1 | | | $ | 10 | | | — | | | $ | — | | | 3 | | | $ | 51 | |
As of December 31, 2021 and 2020, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $16.9 million and $24.7 million, respectively. OFG commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent. Puerto Rico and the USVI require the foreclosure to be processed through the respective territory’s courts. Foreclosure timelines vary according to local law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediation, bankruptcy, court delays and title issues.
Collateral-dependent Loans
The table below present the amortized cost of collateral-dependent loans held for investment at December 31, 2021 and 2020, by class of loans.
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) |
Commercial loans: | | | |
Commercial secured by real estate | $ | 10,233 | | | $ | 29,279 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
PCD loans, except for single pooled loans, are not included in the table above as their unit of account is the loan pool.
Credit Quality Indicators
OFG 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.
OFG 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.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2021 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 Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | |
| | (In thousands) |
Commercial: | | | | | | | | | | | | | | | | |
Commercial secured by real estate: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | $ | 183,820 | | | $ | 120,855 | | | $ | 114,208 | | | $ | 94,864 | | | $ | 52,439 | | | $ | 183,026 | | | $ | 45,178 | | | $ | 794,390 | |
Special Mention | | 654 | | | 628 | | | 32,578 | | | 4,581 | | | 4,053 | | | 5,102 | | | 643 | | | 48,239 | |
Substandard | | 8,415 | | | 10,694 | | | 58 | | | 849 | | | 1,357 | | | 17,555 | | | 1,671 | | | 40,599 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | 22 | | | 744 | | | 766 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial secured by real estate | | 192,889 | | | 132,177 | | | 146,844 | | | 100,294 | | | 57,849 | | | 205,705 | | | 48,236 | | | 883,994 | |
Other commercial and industrial: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | 276,165 | | | 93,809 | | | 45,976 | | | 57,989 | | | 6,106 | | | 6,004 | | | 330,072 | | | 816,121 | |
Special Mention | | 78 | | | 23 | | | 8,076 | | | 2,213 | | | 3,525 | | | — | | | 13,642 | | | 27,557 | |
Substandard | | 112 | | | 48 | | | 155 | | | 394 | | | 81 | | | 28 | | | 1,513 | | | 2,331 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | 52 | | | 52 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other commercial and industrial: | | 276,355 | | | 93,880 | | | 54,207 | | | 60,596 | | | 9,712 | | | 6,032 | | | 345,279 | | | 846,061 | |
US commercial loans: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | 85,394 | | | 61,098 | | | 41,924 | | | 47,179 | | | — | | | — | | | 171,928 | | | 407,523 | |
Special Mention | | — | | | — | | | 1,515 | | | 19,095 | | | — | | | — | | | — | | | 20,610 | |
Substandard | | — | | | 7,156 | | | — | | | 9,651 | | | — | | | — | | | — | | | 16,807 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total US commercial loans: | | 85,394 | | | 68,254 | | | 43,439 | | | 75,925 | | | — | | | — | | | 171,928 | | | 444,940 | |
Total commercial loans | | $ | 554,638 | | | $ | 294,311 | | | $ | 244,490 | | | $ | 236,815 | | | $ | 67,561 | | | $ | 211,737 | | | $ | 565,443 | | | $ | 2,174,995 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 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 Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Total |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | |
| | (In thousands) |
Commercial: | | | | | | | | | | | | | | | | |
Commercial secured by real estate: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | $ | 113,474 | | | $ | 105,156 | | | $ | 106,283 | | | $ | 81,338 | | | $ | 44,008 | | | $ | 187,189 | | | $ | 30,686 | | | $ | 668,134 | |
Special Mention | | 10,592 | | | 20,605 | | | 5,233 | | | 11,771 | | | 8,514 | | | 3,090 | | | 37,680 | | | 97,485 | |
Substandard | | 183 | | | 63 | | | 758 | | | 8,923 | | | 584 | | | 23,746 | | | 7,331 | | | 41,588 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | 77 | | | — | | | 77 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial secured by real estate | | 124,249 | | | 125,824 | | | 112,274 | | | 102,032 | | | 53,106 | | | 214,102 | | | 75,697 | | | 807,284 | |
Other commercial and industrial: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | 384,901 | | | 84,433 | | | 75,023 | | | 14,502 | | | 8,326 | | | 7,922 | | | 300,429 | | | 875,536 | |
Special Mention | | 151 | | | 8,242 | | | 19,626 | | | — | | | — | | | 3,337 | | | 23,732 | | | 55,088 | |
Substandard | | 207 | | | 66 | | | 486 | | | 164 | | | 2,809 | | | 119 | | | 2,122 | | | 5,973 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | 65 | | | 65 | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other commercial and industrial: | | 385,259 | | | 92,741 | | | 95,135 | | | 14,666 | | | 11,135 | | | 11,378 | | | 326,348 | | | 936,662 | |
US commercial loans: | | | | | | | | | | | | | | | | |
Loan grade: | | | | | | | | | | | | | | | | |
Pass | | 68,688 | | | 62,264 | | | 77,762 | | | 7,124 | | | — | | | — | | | 98,324 | | | 314,162 | |
Special Mention | | — | | | 1,501 | | | 33,282 | | | — | | | — | | | — | | | 1,250 | | | 36,033 | |
Substandard | | 7,156 | | | — | | | 17,553 | | | — | | | — | | | — | | | — | | | 24,709 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total US commercial loans: | | 75,844 | | | 63,765 | | | 128,597 | | | 7,124 | | | — | | | — | | | 99,574 | | | 374,904 | |
Total commercial loans | | $ | 585,352 | | | $ | 282,330 | | | $ | 336,006 | | | $ | 123,822 | | | $ | 64,241 | | | $ | 225,480 | | | $ | 501,619 | | | $ | 2,118,850 | |
At December 31, 2021 and 2020, the balance of revolving loans converted to term loans was $37.5 million and $21.0 million, respectively.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG considers the performance of the loan portfolio and its impact on the allowance for credit losses. For mortgage and consumer loan classes, OFG 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 as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| | 2021 | | 2020 | | 2018 | | 2018 | | 2016 | | Prior | | | |
| | (In thousands) |
Mortgage: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | $ | 18,486 | | | $ | 16,585 | | | $ | 15,461 | | | $ | 19,261 | | | $ | 24,872 | | | $ | 584,792 | | | $ | — | | | $ | — | | | $ | 679,457 | |
Nonperforming | | — | | | 126 | | | 129 | | | 510 | | | 1,830 | | | 36,796 | | | — | | | — | | | 39,391 | |
Total mortgage loans: | | 18,486 | | | 16,711 | | | 15,590 | | | 19,771 | | | 26,702 | | | 621,588 | | | — | | | — | | | 718,848 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Personal loans: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | 175,273 | | | 55,960 | | | 65,425 | | | 29,808 | | | 12,287 | | | 6,661 | | | — | | | — | | | 345,414 | |
Nonperforming | | 296 | | | 239 | | | 411 | | | 143 | | | 20 | | | 336 | | | — | | | — | | | 1,445 | |
Total personal loans | | 175,569 | | | 56,199 | | | 65,836 | | | 29,951 | | | 12,307 | | | 6,997 | | | — | | | — | | | 346,859 | |
Credit lines: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 14,549 | | | — | | | 14,549 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | 226 | | | — | | | 226 | |
Total credit lines | | — | | | — | | | — | | | — | | | — | | | — | | | 14,775 | | | — | | | 14,775 | |
Credit cards: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 46,163 | | | — | | | 46,163 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | 632 | | | — | | | 632 | |
Total credit cards | | — | | | — | | | — | | | — | | | — | | | — | | | 46,795 | | | — | | | 46,795 | |
Overdrafts: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 330 | | | — | | | 330 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total overdrafts | | — | | | — | | | — | | | — | | | — | | | — | | | 330 | | | — | | | 330 | |
Total consumer loans | | 175,569 | | | 56,199 | | | 65,836 | | | 29,951 | | | 12,307 | | | 6,997 | | | 61,900 | | | — | | | 408,759 | |
Total mortgage and consumer loans | | $ | 194,055 | | | $ | 72,910 | | | $ | 81,426 | | | $ | 49,722 | | | $ | 39,009 | | | $ | 628,585 | | | $ | 61,900 | | | $ | — | | | $ | 1,127,607 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the amortized cost in mortgage and consumer loans based on payment activity as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | | |
| | (In thousands) |
Mortgage: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | $ | 14,842 | | | $ | 20,516 | | | $ | 27,359 | | | $ | 33,088 | | | $ | 38,637 | | | $ | 664,941 | | | $ | — | | | $ | — | | | $ | 799,383 | |
Nonperforming | | — | | | 347 | | | 722 | | | 894 | | | 950 | | | 44,806 | | | — | | | — | | | 47,719 | |
Total mortgage loans: | | 14,842 | | | 20,863 | | | 28,081 | | | 33,982 | | | 39,587 | | | 709,747 | | | — | | | — | | | 847,102 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Personal loans: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | 88,653 | | | 115,295 | | | 58,009 | | | 28,424 | | | 13,565 | | | 7,181 | | | — | | | — | | | 311,127 | |
Nonperforming | | 201 | | | 591 | | | 492 | | | 318 | | | 134 | | | 394 | | | — | | | — | | | 2,130 | |
Total personal loans | | 88,854 | | | 115,886 | | | 58,501 | | | 28,742 | | | 13,699 | | | 7,575 | | | — | | | — | | | 313,257 | |
Credit lines: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 19,635 | | | — | | | 19,635 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | 511 | | | — | | | 511 | |
Total credit lines | | — | | | — | | | — | | | — | | | — | | | — | | | 20,146 | | | — | | | 20,146 | |
Credit cards: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 54,599 | | | — | | | 54,599 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | 1,586 | | | — | | | 1,586 | |
Total credit cards | | — | | | — | | | — | | | — | | | — | | | — | | | 56,185 | | | — | | | 56,185 | |
Overdrafts: | | | | | | | | | | | | | | | | | | |
Payment performance: | | | | | | | | | | | | | | | | | | |
Performing | | — | | | — | | | — | | | — | | | — | | | — | | | 305 | | | — | | | 305 | |
Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total overdrafts | | — | | | — | | | — | | | — | | | — | | | — | | | 305 | | | — | | | 305 | |
Total consumer loans | | 88,854 | | | 115,886 | | | 58,501 | | | 28,742 | | | 13,699 | | | 7,575 | | | 76,636 | | | — | | | 389,893 | |
Total mortgage and consumer loans | | $ | 103,696 | | | $ | 136,749 | | | $ | 86,582 | | | $ | 62,724 | | | $ | 53,286 | | | $ | 717,322 | | | $ | 76,636 | | | $ | — | | | $ | 1,236,995 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG 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 as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year | | Total |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | |
| (In thousands) |
Auto and leasing: | | | | | | | | | | | | | |
FICO score: | | | | | | | | | | | | | |
1-660 | 161,534 | | | 90,402 | | | 80,745 | | | 65,681 | | | 38,001 | | | 23,171 | | | 459,534 | |
661-699 | 134,507 | | | 68,422 | | | 48,173 | | | 33,854 | | | 16,761 | | | 10,534 | | | 312,251 | |
700+ | 245,148 | | | 180,737 | | | 184,307 | | | 133,098 | | | 63,229 | | | 38,474 | | | 844,993 | |
No FICO | 26,759 | | | 13,580 | | | 17,062 | | | 10,119 | | | 5,515 | | | 3,216 | | | 76,251 | |
Total auto and leasing: | $ | 567,948 | | | $ | 353,141 | | | $ | 330,287 | | | $ | 242,752 | | | $ | 123,506 | | | $ | 75,395 | | | $ | 1,693,029 | |
The following table presents the amortized cost in auto loans and leases based on their most recent FICO score as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year | | Total |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | |
| (In thousands) |
Auto and leasing: | | | | | | | | | | | | | |
FICO score: | | | | | | | | | | | | | |
1-660 | 121,878 | | | 112,476 | | | 97,725 | | | 56,935 | | | 30,307 | | | 22,360 | | | 441,681 | |
661-699 | 84,673 | | | 68,698 | | | 44,633 | | | 23,308 | | | 13,571 | | | 9,031 | | | 243,914 | |
700+ | 173,834 | | | 214,287 | | | 164,205 | | | 85,743 | | | 45,947 | | | 32,177 | | | 716,193 | |
No FICO | 21,512 | | | 42,597 | | | 33,305 | | | 18,127 | | | 9,656 | | | 7,284 | | | 132,481 | |
Total auto and leasing: | $ | 401,897 | | | $ | 438,058 | | | $ | 339,868 | | | $ | 184,113 | | | $ | 99,481 | | | $ | 70,852 | | | $ | 1,534,269 | |
Upon adoption of CECL, OFG 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 tables above.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 7 – ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, OFG 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 OFG’s relevant financial assets. Upon adoption of the new accounting standard, OFG 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 (“ACL”) 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 OFG’s assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, OFG 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 OFG’s credit loss accounting policies, including the allowance for credit losses, see Note 1 – Summary of Significant Accounting Policies.
At December 31, 2021, OFG used an economic probability weighted scenario approach which consist of the baseline and moderate recession scenarios, giving more weight to the baseline scenario. In addition, the ACL at December 31, 2021 continues to include qualitative reserves for certain segments that OFG views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries and consumer retail portfolios. 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 resulting from inflation effect.
The allowance for credit losses decreased during the year ended December 31, 2021, mainly due to updates in macro-economic forecasts and continued asset quality improvement, as reflected in net credit losses, non-performing, and delinquency rates. The provision for credit losses for the year ended December 31, 2021 includes an additional expense of $9.7 million related to the decision to sell $65.5 million of past due loans. The allowance for credit losses for the year ended December 31, 2020 included a $39.9 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic.
The following tables present the activity in OFG’s allowance for credit losses by segment for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Commercial | | Mortgage | | Consumer | | Auto and Leasing | | Total |
| (In thousands) |
Non-PCD: | | | | | | | | | |
Balance at beginning of year | $ | 45,779 | | | $ | 19,687 | | | $ | 25,253 | | | $ | 70,296 | | | $ | 161,015 | |
(Recapture) provision for credit losses | (7,130) | | | (242) | | | 2,868 | | | (2,373) | | | (6,877) | |
Charge-offs | (8,788) | | | (5,789) | | | (11,880) | | | (26,530) | | | (52,987) | |
Recoveries | 2,401 | | | 1,643 | | | 2,900 | | | 23,970 | | | 30,914 | |
Balance at end of year | $ | 32,262 | | | $ | 15,299 | | | $ | 19,141 | | | $ | 65,363 | | | $ | 132,065 | |
PCD: | | | | | | | | | |
Balance at beginning of year | $ | 16,405 | | | $ | 26,389 | | | $ | 57 | | | $ | 943 | | | $ | 43,794 | |
(Recapture) provision for credit losses | (2,585) | | | 11,556 | | | (317) | | | (894) | | | 7,760 | |
Charge-offs | (12,241) | | | (20,350) | | | (22) | | | (946) | | | (33,559) | |
Recoveries | 2,929 | | | 1,423 | | | 316 | | | 1,209 | | | 5,877 | |
Balance at end of year | $ | 4,508 | | | $ | 19,018 | | | $ | 34 | | | $ | 312 | | | $ | 23,872 | |
Total allowance for credit losses at end of year | $ | 36,770 | | | $ | 34,317 | | | $ | 19,175 | | | $ | 65,675 | | | $ | 155,937 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As a result of the decision to sell loans during 2021, OFG recognized $30.1 million in net charge-offs and an additional provision of $9.7 million, decreasing the allowance for credit losses by $20.4 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| Commercial | | Mortgage | | Consumer | | Auto and Leasing | | Total |
| (In thousands) |
Non-PCD: | | | | | | | | | |
Balance at beginning of year | $ | 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 | 18,462 | | | 258 | | | 16,579 | | | 51,233 | | | 86,532 | |
Charge-offs | (4,979) | | | (884) | | | (21,772) | | | (48,547) | | | (76,182) | |
Recoveries | 2,741 | | | 606 | | | 3,582 | | | 19,494 | | | 26,423 | |
Balance at end of year | $ | 45,779 | | | $ | 19,687 | | | $ | 25,253 | | | $ | 70,296 | | | $ | 161,015 | |
PCD: | | | | | | | | | |
Balance at beginning of year | $ | 8,893 | | | $ | 21,655 | | | $ | — | | | $ | 947 | | | $ | 31,495 | |
Impact of ASC 326 adoption | 42,143 | | | 7,830 | | | 181 | | | 368 | | | 50,522 | |
Provision for credit losses | 480 | | | 6,392 | | | 126 | | | 187 | | | 7,185 | |
Charge-offs | (36,097) | | | (10,342) | | | (542) | | | (2,023) | | | (49,004) | |
Recoveries | 986 | | | 854 | | | 292 | | | 1,464 | | | 3,596 | |
Balance at end of year | $ | 16,405 | | | $ | 26,389 | | | $ | 57 | | | $ | 943 | | | $ | 43,794 | |
Total allowance for credit losses at end of year | $ | 62,184 | | | $ | 46,076 | | | $ | 25,310 | | | $ | 71,239 | | | $ | 204,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2019 |
| Commercial | | Mortgage | | 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 year | $ | 30,348 | | | $ | 19,783 | | | $ | 17,476 | | | $ | 29,643 | | | $ | 97,250 | |
Provision for credit losses | 6,731 | | | 5,975 | | | 19,038 | | | 30,789 | | | 62,533 | |
Charge-offs | (12,196) | | | (18,564) | | | (20,435) | | | (47,498) | | | (98,693) | |
Recoveries | 1,110 | | | 1,533 | | | 2,367 | | | 18,944 | | | 23,954 | |
Balance at end of year | $ | 25,993 | | | $ | 8,727 | | | $ | 18,446 | | | $ | 31,878 | | | $ | 85,044 | |
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30: | | | | | | | | | |
Balance at beginning of year | $ | 30,226 | | | $ | 30,607 | | | $ | 4 | | | $ | 6,144 | | | $ | 66,981 | |
Provision (recapture) for credit losses | 13,484 | | | 23,703 | | | — | | | (2,928) | | | 34,259 | |
Allowance derecognition | (34,817) | | | (32,655) | | | (4) | | | (2,269) | | | (69,745) | |
Balance at end of year | $ | 8,893 | | | $ | 21,655 | | | $ | — | | | $ | 947 | | | $ | 31,495 | |
Total allowance for loan and lease losses at end of year | $ | 34,886 | | | $ | 30,382 | | | $ | 18,446 | | | $ | 32,825 | | | $ | 116,539 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8 — FORECLOSED REAL ESTATE
The following tables present the activity related to foreclosed real estate for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance at beginning of year | $ | 11,596 | | | $ | 29,909 | | | $ | 33,768 | |
Additions | 18,221 | | | 3,654 | | | 22,406 | |
Sales | (14,758) | | | (18,521) | | | (20,642) | |
Decline in value | (1,450) | | | (2,489) | | | (4,762) | |
Other adjustments | 1,430 | | | (957) | | | (861) | |
Balance at end of year | $ | 15,039 | | | $ | 11,596 | | | $ | 29,909 | |
NOTE 9 — PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2021 and 2020 are stated at cost less accumulated depreciation and amortization as follows:
| | | | | | | | | | | | | | | | | |
| Useful Life (Years) | | December 31, |
| | 2021 | | 2020 |
| | | (In thousands) |
Land | — | | $ | 4,080 | | | $ | 4,363 | |
Buildings and improvements | 40 | | 77,988 | | | 75,974 | |
Leasehold improvements | 5 — 10 | | 20,929 | | | 22,439 | |
Furniture and fixtures | 3 — 7 | | 19,378 | | | 17,517 | |
Information technology and other | 3 — 7 | | 43,156 | | | 40,273 | |
| | | 165,531 | | | 160,566 | |
Less: accumulated depreciation and amortization | | | (73,407) | | | (76,780) | |
| | | $ | 92,124 | | | $ | 83,786 | |
Depreciation and amortization of premises and equipment totaled $14.1 million in 2021, $12.7 million in 2020 and $8.5 million in 2019. These are included in the consolidated statements of operations as part of occupancy and equipment expenses.
NOTE 10 - SERVICING ASSETS
At December 31, 2021, the fair value of mortgage servicing rights was $49.0 million ($47.3 million — December 31, 2020).
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the changes in servicing rights measured using the fair value method for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Fair value at beginning of year | $ | 47,295 | | | $ | 50,779 | | | $ | 10,716 | |
Servicing from mortgage securitization or asset transfers | 6,089 | | | 2,394 | | | 1,174 | |
Additions from servicing portfolio acquired[1] | — | | | — | | | 40,463 | |
Changes due to payments on loans | (6,738) | | | (4,067) | | | (906) | |
Changes in fair value due to changes in valuation model inputs or assumptions | 2,327 | | | (1,811) | | | (668) | |
Fair value at end of year | $ | 48,973 | | | $ | 47,295 | | | $ | 50,779 | |
[1] Represents servicing assets acquired in the Scotiabank Acquisition completed on December 31, 2019. |
The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Constant prepayment rate | 3.90% - 24.48% | | 5.02% - 35.22% | | 4.5% - 18.81% |
Discount rate | 10.00% - 15.50% | | 10.00% - 15.50% | | 10.00% - 15.00% |
The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key assumptions were as follows:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Mortgage-related servicing asset | |
Carrying value of mortgage servicing asset | $ | 48,973 | |
Constant prepayment rate | |
Decrease in fair value due to 10% adverse change | $ | (1,020) | |
Decrease in fair value due to 20% adverse change | $ | (2,004) | |
Discount rate | |
Decrease in fair value due to 10% adverse change | $ | (2,175) | |
Decrease in fair value due to 20% adverse change | $ | (4,183) | |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption.
Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the years ended December 31, 2021, 2020 and 2019 totaled $21.4 million, $17.2 million and $4.2 million, respectively.
NOTE 11 — DERIVATIVES
OFG’s overall interest rate risk-management strategy incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Derivative instruments that are used as part of OFG’s interest rate risk-management strategy include interest rate swaps and caps.
As of December 31, 2021 and 2020, the notional amount of derivative contracts outstanding was $28.5 million and $30.3 million respectively. The gross fair value of derivative asset was $1 thousand and zero, respectively, and the gross fair value of derivatives liabilities were $804 thousand and $1.7 million, respectively. The impact of master netting agreements was not material. Derivative and hedging activities were not material for the years ended December 31, 2021, 2020 and 2019. See Note 1– Summary of Significant Accounting Policies for additional information.
NOTE 12 — GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2021 and 2020, OFG had $86.1 million of goodwill allocated as follows: $84.1 million to the banking segment and $2.0 million to the wealth management segment (refer to Note 29 – Business Segments for the definition of OFG’s reportable business segments). There were no changes in the carrying amount of goodwill for the years ended December 31, 2021, 2020 and 2019. No goodwill was recorded in connection with the Scotiabank Acquisition.
Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting segment is less than its carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, natural disasters, or similar events.
OFG performed its annual impairment review of goodwill during the fourth quarters of 2021 and 2020 using October 31, 2021 and 2020, respectively, as the annual evaluation dates and concluded that there was no impairment at December 31, 2021 and 2020.
In connection with reviewing our financial condition in light of the Covid-19 pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of December 31, 2021 and 2020, no impairments have been recorded.
The following table reflects the components of other intangible assets subject to amortization at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
| | (In thousands) |
December 31, 2021 | | | | | | |
Core deposit intangibles | | $ | 51,402 | | | $ | 23,772 | | | $ | 27,630 | |
Customer relationship intangibles | | 17,753 | | | 9,385 | | | 8,368 | |
Other intangibles | | 567 | | | 472 | | | 95 | |
Total other intangible assets | | $ | 69,722 | | | $ | 33,629 | | | $ | 36,093 | |
December 31, 2020 | | | | | | |
Core deposit intangibles | | $ | 51,402 | | | $ | 16,419 | | | $ | 34,983 | |
Customer relationship intangibles | | 17,753 | | | 7,124 | | | 10,629 | |
Other intangibles | | 567 | | | 283 | | | 284 | |
Total other intangible assets | | $ | 69,722 | | | $ | 23,826 | | | $ | 45,896 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In connection with the Eurobank Acquisition, the BBVAPR Acquisition and the Scotiabank Acquisition, OFG recorded a core deposit intangible representing the value of checking and savings deposits acquired. In addition, OFG recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of a securities broker-dealer and insurance agency in the BBVAPR Acquisition and an insurance agency in the Scotiabank Acquisition
Other intangible assets have a definite useful life. Amortization of other intangible assets for the years ended December 31, 2021, 2020 and 2019 was $9.8 million, $11.1 million, and $1.2 million, respectively.
The following table presents the estimated amortization of other intangible assets for each of the following periods.
| | | | | | | | |
Year Ending December 31, | | (In thousands) |
2022 | | $ | 8,501 | |
2023 | | 6,898 | |
2024 | | 5,913 | |
2025 | | 4,927 | |
2026 | | 3,942 | |
Thereafter | | 5,912 | |
NOTE 13 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at December 31, 2021 and 2020 consists of the following:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Loans | $ | 54,794 | | | $ | 64,465 | |
Investments | 1,766 | | | 1,082 | |
| $ | 56,560 | | | $ | 65,547 | |
OFG estimates expected credit losses on accrued interest receivable for loans that participated in the Covid-19 deferral programs. An allowance has been established for loans 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. At December 31, 2021 and 2020, the allowance for credit losses for accrued interest receivable for loans that participated in the Covid-19 deferral programs amounted to $161 thousand and $711 thousand, respectively, and is included in accrued interest receivable in the statement of financial condition.
Other assets at December 31, 2021 and 2020 consist of the following:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Prepaid expenses | $ | 61,061 | | | $ | 61,332 | |
Other repossessed assets | 1,945 | | | 1,816 | |
Investment in Statutory Trust | 1,083 | | | 1,083 | |
Accounts receivable and other assets | 88,756 | | | 78,845 | |
| $ | 152,845 | | | $ | 143,076 | |
Prepaid expenses amounting to $61.1 million at December 31, 2021, include prepaid municipal, property and income taxes aggregating to $54.6 million. At December 31, 2020 prepaid expenses amounted to $61.3 million, including prepaid municipal, property and income taxes aggregating to $54.3 million.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other repossessed assets totaled $1.9 million and $1.8 million at December 31, 2021 and 2020, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.
NOTE 14— DEPOSITS AND RELATED INTEREST
Total deposits, including related accrued interest payable, as of December 31, 2021 and 2020 consist of the following:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Non-interest bearing demand deposits | $ | 2,501,644 | | | $ | 2,259,048 | |
Interest-bearing savings and demand deposits | 4,880,476 | | | 4,274,586 | |
Retail certificates of deposit | 1,007,577 | | | 1,540,406 | |
Institutional certificates of deposit | 202,050 | | | 292,485 | |
Total core deposits | 8,591,747 | | | 8,366,525 | |
Brokered deposits | 11,371 | | | 49,115 | |
Total deposits | $ | 8,603,118 | | | $ | 8,415,640 | |
Brokered deposits include $11.4 million in certificates of deposits at December 31, 2021, and $25.0 million in certificates of deposits and $24.1 million in money market accounts at December 31, 2020. During the year ended December 31, 2021, money market accounts were reclassified from brokered deposits to interest-bearing savings accounts as a result of an FDIC exemption from the brokered deposits definition. At December 31, 2021, these money market amounted to $22.5 million.
At December 31, 2021 and 2020, the aggregate amount of uninsured deposits was $3.270 billion and $3.179 billion, respectively.
The weighted average interest rate of OFG’s deposits was 0.49% and 0.80%, respectively, at December 31, 2021 and 2020. Interest expense for the years ended December 31, 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Demand and savings deposits | $ | 23,713 | | | $ | 25,798 | | | $ | 14,925 | |
Certificates of deposit | 15,301 | | | 34,400 | | | 24,430 | |
| $ | 39,014 | | | $ | 60,198 | | | $ | 39,355 | |
At December 31, 2021 and 2020, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $360.8 million and $628.4 million, respectively.
At December 31, 2021 and 2020, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $183.8 million and $218.9 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $228.9 million and $242.7 million at December 31, 2021 and 2020, respectively.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Excluding accrued interest of approximately $736 thousand and $1.5 million, the scheduled maturities of certificates of deposit at December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
December 31, 2021 | |
| Period-end amount | | Uninsured amount |
| (In thousands) |
Within one year: | | | |
Three months or less | $ | 252,513 | | | $ | 25,003 | |
Over 3 months through 6 months | 147,400 | | | 12,113 | |
Over 6 months through 1 year | 239,830 | | | 45,280 | |
| 639,743 | | | 82,396 | |
Over 1 through 2 years | 328,177 | | | 60,108 | |
Over 2 through 3 years | 114,403 | | | 18,578 | |
Over 3 through 4 years | 77,604 | | | 22,536 | |
Over 4 through 5 years | 58,918 | | | 8,505 | |
Over 5 years | 1,417 | | | — | |
| $ | 1,220,262 | | | $ | 192,123 | |
| | | |
December 31, 2020 | | | |
| Period-end amount | | Uninsured amount |
| (In thousands) |
| | | |
Within one year: | | | |
Three months or less | $ | 379,563 | | | 51,172 | |
Over 3 months through 6 months | 403,873 | | | 79,297 | |
Over 6 months through 1 year | 401,244 | | | 82,070 | |
| 1,184,680 | | | 212,539 | |
Over 1 through 2 years | 328,336 | | | 52,263 | |
Over 2 through 3 years | 177,701 | | | 37,351 | |
Over 3 through 4 years | 75,094 | | | 16,412 | |
Over 4 through 5 years | 84,390 | | | 23799 |
Over 5 years | 6,199 | | | 3,500 | |
| $ | 1,856,400 | | | $ | 345,864 | |
The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $491 thousand and $1.1 million as of December 31, 2021 and 2020, respectively.
NOTE 15— BORROWINGS AND RELATED INTEREST
Advances from the Federal Home Loan Bank of New York
Advances are received from the FHLB-NY under an agreement whereby OFG is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2021 and 2020, these advances were secured by mortgage and commercial loans amounting to $949.0 million and $1.159 billion, respectively. Also, at December 31, 2021 and 2020, OFG had an additional borrowing capacity with the FHLB-NY of $697.3 million and $814.0 million, respectively. At December 31, 2021 and 2020, the weighted average remaining
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
maturity of FHLB’s advances was 3 days and 18.2 months, respectively. The original term of the outstanding advance at December 31, 2021 is 1 month.
The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $8 thousand and $96 thousand at December 31, 2021 and 2020, respectively:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 0.35% (December 31, 2020 - 0.34% ) | $ | 28,480 | | | $ | 30,259 | |
Long-term fixed-rate advances from FHLB, with a weighted average interest rate from 2.92% to 3.24% at December 31, 2020 | — | | | 35,206 | |
| $ | 28,480 | | | $ | 65,465 | |
Advances from FHLB mature as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Under 90 days | $ | 28,480 | | | $ | 30,259 | |
Over one to three years | — | | | 30,972 | |
Over three to five years | — | | | 4,234 | |
| | | |
| $ | 28,480 | | | $ | 65,465 | |
Subordinated Capital Notes
Subordinated capital notes amounted to $36.1 million at both December 31, 2021 and 2020.
In August 2003, the Statutory Trust II, a special purpose entity of OFG, was formed for the purpose of issuing trust redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the Statutory Trust II as part of a pooled underwriting transaction.
The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated deferrable interest debenture issued by OFG. The subordinated deferrable interest debenture has a par value of $36.1 million, bears interest based on 3-month LIBOR plus 295 basis points (3.17% at December 31, 2021; 3.18% at 2020), is payable quarterly, and matures on September 17, 2033. It may be called at par after five years and quarterly thereafter (next call date March 2022). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest debenture. The subordinated deferrable interest debenture issued by OFG is accounted for as a liability denominated as a “subordinated capital” note on the consolidated statements of financial condition.
The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the Basel III capital rules issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as OFG, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, OFG is permitted to continue to include its existing trust preferred securities as Tier 1 capital.
NOTE 16 — EMPLOYEE BENEFIT PLAN
OFG has a profit-sharing plan containing a cash or deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d) of the Puerto Rico Internal Revenue Code of 2011, as amended, (the “PR Code”), and Sections 401(a) and 401(k) of the United States Internal Revenue Code of 1986, as amended (the “US Code”). The plan is subject to the provisions of Title I of the Employee Retirement Income Security Act of 1976, as amended (“ERISA”). This plan covers all full-time employees of OFG who are age 21 or older. Under this plan, participants may contribute each year up to
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
$19,500. OFG’s matching contribution is 50 cents for each dollar contributed by an employee, up to 4% of such employee’s base salary. It is invested in accordance with the employee’s decision among the available investment alternatives provided by the plan. This plan is entitled to acquire and hold qualifying employer securities as part of its investment of the trust assets pursuant to ERISA Section 407. OFG contributed $2.3 million in cash during both 2021 and 2020 and $923 thousand during 2019. OFG’s contribution becomes 100% vested once the employee completes three years of service. In December 2020, all the balances related to the Retirement Plan for Scotiabank de Puerto Rico employee accounts were merged into the plan.
Also, OFG offers to its senior management a non-qualified deferred compensation plan, whereby participants can defer taxable income. Both the employer and the employee have flexibility because non-qualified plans may not be subject to ERISA and the PR Code and the US Code contribution limits and discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current taxable income is reduced by the amount being deferred. Generally, funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Income taxes are due when the funds are withdrawn.
NOTE 17 — RELATED PARTY TRANSACTIONS
OFG grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the years ended December 31, 2021, 2020, and 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance at the beginning of year | $ | 21,112 | | | $ | 22,312 | | | $ | 28,520 | |
New loans and disbursements | 8,233 | | | 17,896 | | | 203 | |
Repayments | (3,430) | | | (19,096) | | | (6,411) | |
Balance at the end of year | $ | 25,915 | | | $ | 21,112 | | | $ | 22,312 | |
OFG also hired professional services amounting to $5.0 million, $3.2 million and $3.7 million for the years ended December 31, 2021, 2020, and 2019, respectively, from a related party.
OFG, through its banking subsidiary, entered into a commitment to make an equity investment in a limited partnership classified as a small business investment company. The partnership is managed by a Puerto Rico limited liability company, as general partner, which is led by a group of investment professionals, including members of the Board of Directors of OFG. OFG, as limited partner, committed to the partnership $3.0 million. At December 31, 2021 and 2020, OFG’s investment in the partnership amounted to $1.8 million and $1.1 million, respectively.
NOTE 18 — INCOME TAXES
Oriental is subject to the dispositions of the PR Code. For 2021, the PR Code imposed a maximum statutory corporate tax rate of 37.5%. OFG has operations in the U.S. through its wholly owned subsidiary OPC, a retirement plan administration based in Florida. In October 2017, OFG expanded its operations in the United States through the Bank’s wholly owned subsidiary, OFG USA. In March 2019, OFG incorporated in Delaware OFG Ventures, a limited liability company, which will hold new investments; and, on December 31, 2019, OFG established a new branch in USVI acquired as a result of the Scotiabank Acquisition. The United States subsidiaries are subject to federal income taxes at the corporate level, while the USVI branch is subject to the federal income taxes under a mirror system and a 10% surtax included in the maximum tax rate. OPC is subject to Florida state taxes, OFG USA is subject to North Carolina state taxes, and current investments in OFG Ventures are subject to state taxes in Missouri. In addition, during 2021, OFG incorporated in Grand Cayman, as a foreign wholly owned subsidiary, OFG Reinsurance. OFG Reinsurance is tax exempt in Grand Cayman.
Under the PR Code, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. OFG and its subsidiaries organized under the laws of Puerto Rico are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income earned from all sources. OFG’s subsidiaries organized outside of Puerto Rico are taxed in Puerto Rico only with respect to income from Puerto Rico sources or effectively connected to a Puerto Rico trade or business. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of income tax expense for the years ended December 31, 2021, 2020, and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Current income tax expense (benefit) | $ | 4,836 | | | $ | (7,347) | | | $ | 25,477 | |
Deferred income tax expense (benefit) | 63,616 | | | 27,846 | | | (4,068) | |
Total income tax expense | $ | 68,452 | | | $ | 20,499 | | | $ | 21,409 | |
In relation to the exempt income level, the Bank’s investment securities portfolio and loans portfolio generated net tax-exempt interest income of $14.4 million at 2021, $15.2 million at 2020 and $11.8 million at 2019. OIB generated exempt income of $9.5 million, $4.1 million and $10.3 million for 2021, 2020, and 2019, respectively.
OFG maintained an effective tax rate lower than statutory rate for the year ended December 31, 2021, mainly by investing in tax-exempt obligations, doing business through its international banking entities and by expanding its subsidiary operations in the U.S., which are taxed at a lower rate.
OFG’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| (Dollars in thousands) |
Income tax expense at statutory rates | $ | 80,476 | | | 37.50 | % | | $ | 35,567 | | | 37.50 | % | | $ | 28,219 | | | 37.50 | % |
Tax of exempt income, net | (9,489) | | | -4.42 | % | | (7,272) | | | -7.67 | % | | (8,728) | | | -11.60 | % |
Disallowed net operating loss carryover | (179) | | | -0.08 | % | | 202 | | | 0.21 | % | | 384 | | | 0.51 | % |
Change in valuation allowance | 803 | | | 0.37 | % | | 2,267 | | | 2.39 | % | | 1,217 | | | 1.62 | % |
Unrecognized tax benefits, net | 70 | | | 0.03 | % | | (1,941) | | | -2.05 | % | | 1,794 | | | 2.38 | % |
Capital gain at preferential rate | (3) | | | — | % | | (450) | | | -0.47 | % | | (265) | | | -0.35 | % |
| | | | | | | | | | | |
Tax rate difference (ordinary vs capital) | (480) | | | -0.22 | % | | (4,218) | | | -4.45 | % | | — | | | — | % |
Bargain purchase gain | — | | | — | % | | (2,751) | | | -2.90 | % | | (118) | | | -0.16 | % |
Return to provision adjustments | (933) | | | -0.43 | % | | (1,099) | | | -1.16 | % | | (898) | | | -1.19 | % |
Foreign tax credit | 187 | | | 0.09 | % | | 361 | | | 0.38 | % | | — | | | — | % |
Other items, net | (2,000) | | | -0.94 | % | | (167) | | | -0.16 | % | | (196) | | | -0.25 | % |
Income tax expense | $ | 68,452 | | | 31.90 | % | | $ | 20,499 | | | 21.62 | % | | $ | 21,409 | | | 28.46 | % |
OFG’s effective tax rate for the year ended December 31, 2021 was 31.90%. For the year ended December 31, 2020, the effective tax rate was 21.62%, and it was mainly affected by several items pertaining to the year 2020 that were not expected to reoccur on future years, such as the bargain purchase gain and tax rate differentials. For the year ended December 31, 2019, the effective tax rate was 28.46%.
OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At December 31, 2021, the amount of unrecognized tax benefits was $798 thousand (December 31, 2020 - $728 thousand). OFG had accrued $70 thousand at December 31, 2021 (December 31, 2020 - $50 thousand) for the payment of interest and penalties related to unrecognized tax benefits.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents a reconciliation of unrecognized tax benefits:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance at beginning of year | $ | 728 | | | $ | 2,668 | | | $ | 875 | |
Additions for tax positions of prior years | 70 | | | 50 | | | 51 | |
Additions due to new tax positions | — | | | — | | | 2,181 | |
Reduction for tax positions as a result of lapse of statute of limitations or new information resulting in a change in assessment | — | | | (1,990) | | | (439) | |
Balance at end of year | $ | 798 | | | $ | 728 | | | $ | 2,668 | |
OFG follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The amount of unrecognized tax benefits may increase or decrease in the future due to new or current tax year positions, expiration of open income tax returns, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity. For 2021, there was a net increase in unrecognized tax benefit of $70 thousand.
The statute of limitations under the PR Code is four years and the statute of limitations for federal tax purposes is three years, after a tax return is due or filed, whichever is later. OFG is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2017 to 2020, until the applicable statute of limitations expires. In addition, OFG’s US subsidiaries are potentially subject to income tax audits by the IRS for taxable years 2018 to 2020. Tax audits by their nature are often complex and can require several years to complete.
The determination of the deferred tax expense or benefit is generally based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of OFG’s net deferred tax assets assumes that OFG will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, OFG may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Significant components of OFG’s deferred tax assets and liabilities as of December 31, 2021, and 2020 were as follows:
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Deferred tax asset: | | | |
Allowance for loan and lease losses and other reserves | $ | 61,009 | | | $ | 83,578 | |
Scotiabank PR discount | 2,053 | | | $ | 5,461 | |
Loans and other real estate valuation adjustment | 3,660 | | | 5,769 | |
Deferred loan charge-offs | 115,661 | | | 140,445 | |
Net operating loss carry forwards | 8,460 | | | 7,947 | |
Alternative minimum tax | 15,385 | | | 15,513 | |
Unrealized net loss included in other comprehensive income | 301 | | | 642 | |
Deferred loan origination income, net | — | | | 5,147 | |
Goodwill | 16,961 | | | 23,927 | |
Acquired portfolio | 53,687 | | | 52,301 | |
Other assets allowances | 929 | | | 525 | |
Other deferred tax assets | 20,292 | | | 24,767 | |
Total gross deferred tax asset | 298,397 | | | 366,022 | |
Less: valuation allowance | (9,645) | | | (8,842) | |
Net gross deferred tax assets | 288,752 | | | 357,180 | |
Deferred tax liability: | | | |
Acquired loans tax basis | (137,402) | | | (135,816) | |
FDIC-assisted Eurobank acquisition, net | (6,636) | | | (9,171) | |
Customer deposit and customer relationship intangibles | (10,324) | | | (13,823) | |
Building valuation adjustment | (6,976) | | | (7,412) | |
Unrealized net gain on available-for-sale securities | (1,572) | | | (2,106) | |
Servicing asset | (15,311) | | | (14,682) | |
Other deferred tax liabilities | (11,468) | | | (11,692) | |
Total gross deferred tax liabilities | (189,689) | | | (194,702) | |
Net deferred tax asset | $ | 99,063 | | | $ | 162,478 | |
As of December 31, 2021 and 2020, OFG’s net deferred tax asset, net of a valuation allowance of $9.6 million and $8.8 million, respectively, amounted to $99.1 million and $162.5 million, respectively. The deferred tax assets as of December 31, 2020, included SBPR Acquisition related deferred tax assets amounting of $59.9 million. The acquisition of SBPR was a nontaxable transaction where the historical tax bases of the acquired business carries over to the acquirer; the historical tax bases include a tax-deductible goodwill from prior acquisitions of SBPR with a deferred tax asset of $30.4 million.
The increase in valuation allowance of $803 thousand was mainly related to OFG’s operations at the USVI branch. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax asset are deductible, and provisions of certain closing agreements, management believes it is more likely than not that OFG will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2021. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if there are changes in estimates of future taxable income.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 19 — REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital Requirements
OFG (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on OFG’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, OFG and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules based on the framework of the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”), which became effective January 1, 2015 for OFG and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the Basel III capital rules: (i) introduce a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The Basel III capital rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes.
Pursuant to the Basel III capital rules, OFG and the Bank are required to maintain the following:
•A minimum ratio of Common equity Tier 1 capital (“CET1”) to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” that is composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%).
•A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%).
•A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%).
•A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
In July 2019, the federal banking regulatory agencies adopted a final rule, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 that simplifies for banking organizations following non-advanced approaches the regulatory capital treatment for mortgage servicing assets (“MSAs”) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increased CET1 capital threshold deductions from 10% to 25% and removed the aggregate 15% CET1 threshold deduction. However, it retained the 250% risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. OFG implemented the simplifications to the capital rule on January 1, 2020.
On January 1, 2020, OFG adopted CECL with the initial implementation adjustment to Non-PCD loans and off-balance sheet instruments against retained earnings. On March 27, 2020, in response to the Covid-19 pandemic, U.S. banking regulators issued an interim final rule that OFG adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, OFG added back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.
As of December 31, 2021 and 2020, OFG and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2021 and 2020, OFG and the Bank are “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG’s and the Bank’s actual capital amounts and ratios as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement (including capital conservation buffer) | | Minimum to be Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
OFG Bancorp Ratios | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
Total capital to risk-weighted assets | $ | 1,086,897 | | | 15.52 | % | | $ | 735,512 | | | 10.50 | % | | $ | 700,488 | | | 10.00 | % |
Tier 1 capital to risk-weighted assets | $ | 999,284 | | | 14.27 | % | | $ | 595,414 | | | 8.50 | % | | $ | 560,390 | | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | $ | 964,284 | | | 13.77 | % | | $ | 490,341 | | | 7.00 | % | | $ | 455,317 | | | 6.50 | % |
Tier 1 capital to average total assets | $ | 999,284 | | | 9.69 | % | | $ | 412,359 | | | 4.00 | % | | $ | 515,449 | | | 5.00 | % |
As of December 31, 2020 | | | | | | | | | | | |
Total capital to risk-weighted assets | $ | 1,096,766 | | | 16.04 | % | | $ | 717,974 | | | 10.50 | % | | $ | 683,785 | | | 10.00 | % |
Tier 1 capital to risk-weighted assets | $ | 1,010,945 | | | 14.78 | % | | $ | 581,217 | | | 8.50 | % | | $ | 547,028 | | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | $ | 894,075 | | | 13.08 | % | | $ | 478,649 | | | 7.00 | % | | $ | 444,460 | | | 6.50 | % |
Tier 1 capital to average total assets | $ | 1,010,945 | | | 10.30 | % | | $ | 392,424 | | | 4.00 | % | | $ | 490,530 | | | 5.00 | % |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement (including capital conservation buffer) | | Minimum to be Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
Bank Ratios | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
Total capital to risk-weighted assets | $ | 995,549 | | | 14.34 | % | | $ | 728,867 | | | 10.50 | % | | $ | 694,159 | | | 10.00 | % |
Tier 1 capital to risk-weighted assets | $ | 908,717 | | | 13.09 | % | | $ | 590,035 | | | 8.50 | % | | $ | 555,327 | | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | $ | 908,717 | | | 13.09 | % | | $ | 485,911 | | | 7.00 | % | | $ | 451,203 | | | 6.50 | % |
Tier 1 capital to average total assets | $ | 908,717 | | | 8.87 | % | | $ | 409,855 | | | 4.00 | % | | $ | 512,319 | | | 5.00 | % |
As of December 31, 2020 | | | | | | | | | | | |
Total capital to risk-weighted assets | $ | 1,044,275 | | | 15.32 | % | | $ | 714,480 | | | 10.50 | % | | $ | 680,457 | | | 10.00 | % |
Tier 1 capital to risk-weighted assets | $ | 786,731 | | | 14.06 | % | | $ | 578,388 | | | 8.50 | % | | $ | 544,366 | | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | $ | 956,845 | | | 14.06 | % | | $ | 476,320 | | | 7.00 | % | | $ | 442,297 | | | 6.50 | % |
Tier 1 capital to average total assets | $ | 956,845 | | | 9.81 | % | | $ | 390,304 | | | 4.00 | % | | $ | 487,879 | | | 5.00 | % |
NOTE 20 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalents, as well as equity-based performance awards.
The activity in outstanding options for the years ended December 31, 2021, 2020, and 2019 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number Of Options | | Weighted Average Exercise Price | | Number Of Options | | Weighted Average Exercise Price | | Number Of Options | | Weighted Average Exercise Price |
Beginning of year | 481,444 | | | $ | 15.10 | | | 634,294 | | | $ | 14.60 | | | 739,326 | | | $ | 14.28 | |
Options granted | — | | | — | | | — | | | — | | | — | | | — | |
Options exercised | (140,850) | | | 13.51 | | | (119,500) | | | 12.36 | | | (105,032) | | | 12.32 | |
Options forfeited | (2,100) | | | 16.55 | | | (33,350) | | | 15.42 | | | — | | | — | |
End of year | 338,494 | | | $ | 15.76 | | | 481,444 | | | $ | 15.10 | | | 634,294 | | | $ | 14.60 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding | | Exercisable |
Range of Exercise Prices | Number of Options | | Weighted Average Exercise Price | | Weighted Average Contract Life Remaining (Years) | | Number of Options | | Weighted Average Exercise Price |
11.27 to 14.08 | 36,594 | | | 11.83 | | | 4.0 | | 36,594 | | | 11.83 | |
14.09 to 16.90 | 182,700 | | | 15.44 | | | 2.5 | | 182,700 | | | 15.44 | |
16.91 to 19.71 | 119,200 | | | 17.44 | | | 2.7 | | 119,200 | | | 17.44 | |
| 338,494 | | | $ | 15.76 | | | 2.7 | | 338,494 | | | $ | 15.76 | |
Aggregate Intrinsic Value | $ | 1,655,880 | | | | | | | $ | 1,655,880 | | | |
There were no options granted during 2021, 2020 and 2019. The average fair value of each option granted would have been estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in OFG’s stock options. Use of an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant.
The following table summarizes the activity in restricted units under the Omnibus Plan for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Restricted Units | | Weighted Average Grant Date Fair Value | | Restricted Units | | Weighted Average Grant Date Fair Value | | Restricted Units | | Weighted Average Grant Date Fair Value |
Beginning of year | 529,770 | | | $ | 15.58 | | | 379,150 | | | $ | 15.32 | | | 254,050 | | | $ | 12.50 | |
Restricted units granted | 205,440 | | | 18.76 | | | 257,850 | | | 16.82 | | | 125,100 | | | 21.36 | |
Restricted units lapsed | (218,188) | | | 13.85 | | | (102,525) | | | 14.74 | | | — | | | — | |
Restricted units forfeited | (5,282) | | | 19.38 | | | (4,705) | | | 15.93 | | | — | | | — | |
End of year | 511,740 | | | $ | 19.35 | | | 529,770 | | | $ | 15.58 | | | 379,150 | | | $ | 15.32 | |
The total unrecognized compensation cost related to non-vested restricted units to members of management at December 31, 2021 was $3.9 million and is expected to be recognized over a weighted-average period of 1.5 years.
NOTE 21 – STOCKHOLDERS’ EQUITY
Preferred Stock and Common Stock
During the year ended December 31, 2021, OFG redeemed all of its outstanding Series A, Series B and Series D preferred stock at a redemption price of $25.00 per share. As a result of such redemptions, OFG no longer has any outstanding preferred stock. As of December 31, 2020 preferred stock amounted $92.0 million. At both December 31, 2021 and 2020, common stock amounted to $59.9 million.
Additional Paid-in Capital
Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. At both December 31, 2021 and 2020, accumulated common stock issuance costs charged against additional paid-in capital amounted to $13.6 million. At December 31, 2020, accumulated preferred stock issuance costs charged against additional paid in capital amounted to $10.1 million.
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Legal Surplus
The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2021 and 2020, the Bank’s legal surplus amounted to $117.7 million and $103.3 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.
Treasury Stock
On July 2021, OFG announced the approval by the Board of Directors of a stock repurchase program to purchase an additional $50.0 million of its outstanding shares of common stock. The shares of common stock repurchased are held by OFG as treasury shares. During the year ended December 31, 2021, OFG completed the program and repurchased 2,052,429 shares for a total of $49.9 million at an average price of $24.29 per share. During the year ended December 31, 2020, OFG repurchased 175,000 shares under the previous repurchase program for a total of $2.2 million, at an average price of $12.69 per share. During the year ended December 31, 2019, OFG did not repurchase any shares under the programs.
OFG did not purchase any shares of its common stock during the years ended December 31, 2021, 2020 and 2019, other than through its publicly announced stock repurchase programs.
The activity in connection with common shares held in treasury by OFG for the years ended December 31, 2021, 2020 and 2019 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Shares | | Dollar Amount | | Shares | | Dollar Amount | | Shares | | Dollar Amount |
| (In thousands, except shares data) |
Beginning of year | 8,498,163 | | | $ | 102,949 | | | 8,486,278 | | | $ | 102,339 | | | 8,591,310 | | | $ | 103,633 | |
Common shares used upon lapse of restricted stock units and options | (301,710) | | | (2,249) | | | (163,115) | | | (1,616) | | | (105,032) | | | (1,294) | |
Common shares repurchased as part of the stock repurchase program | 2,052,429 | | | 49,872 | | | 175,000 | | | 2,226 | | | — | | | — | |
End of year | 10,248,882 | | | $ | 150,572 | | | 8,498,163 | | | $ | 102,949 | | | 8,486,278 | | | $ | 102,339 | |
NOTE 22 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of income taxes, as of December 31, 2021 and 2020 consisted of:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Unrealized loss on securities available-for-sale which are not other-than-temporarily impaired | $ | 7,292 | | | $ | 14,262 | |
Income tax effect of unrealized loss on securities available-for-sale | (1,629) | | | (2,170) | |
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired | 5,663 | | | 12,092 | |
Unrealized loss on cash flow hedges | (804) | | | (1,711) | |
Income tax effect of unrealized loss on cash flow hedges | 301 | | | 641 | |
Net unrealized loss on cash flow hedges | (503) | | | (1,070) | |
Accumulated other comprehensive income, net of income taxes | $ | 5,160 | | | $ | 11,022 | |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents changes in accumulated other comprehensive income by component, net of taxes, for years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Net unrealized gains on Securities available-for-sale | | Net unrealized loss on cash flow hedges | | Accumulated other comprehensive (loss) income |
| (In thousands) |
Beginning balance | $ | 12,092 | | | $ | (1,070) | | | $ | 11,022 | |
Other comprehensive loss before reclassifications | (6,454) | | | (1,074) | | | (7,528) | |
Amounts reclassified out of accumulated other comprehensive income | 25 | | | 1,641 | | | 1,666 | |
Other comprehensive income (loss) | (6,429) | | | 567 | | | (5,862) | |
Ending balance | $ | 5,663 | | | $ | (503) | | | $ | 5,160 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Net unrealized gains on Securities available-for-sale | | Net unrealized loss on cash flow hedges | | Accumulated other comprehensive (loss) income |
| (In thousands) |
Beginning balance | $ | (441) | | | $ | (567) | | | $ | (1,008) | |
| | | | | |
Other comprehensive income (loss) before reclassifications | 7,803 | | | (2,491) | | | 5,312 | |
Amounts reclassified out of accumulated other comprehensive income | 4,730 | | | 1,988 | | | 6,718 | |
Other comprehensive income (loss) | 12,533 | | | (503) | | | 12,030 | |
Ending balance | $ | 12,092 | | | $ | (1,070) | | | $ | 11,022 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Net unrealized gains on Securities available-for-sale | | Net unrealized loss on cash flow hedges | | Accumulated other comprehensive (loss) income |
| (In thousands) |
Beginning balance | $ | (10,972) | | | $ | 9 | | | $ | (10,963) | |
Transfer of securities held-to-maturity to available for sale [1] | (12,041) | | | — | | | $ | (12,041) | |
Other comprehensive income (loss) before reclassifications | 14,335 | | | (2,442) | | | 11,893 | |
Amounts reclassified out of accumulated other comprehensive income | 8,237 | | | 1,866 | | | 10,103 | |
Other comprehensive income (loss) | 10,531 | | | (576) | | | 9,955 | |
Ending balance | $ | (441) | | | $ | (567) | | | $ | (1,008) | |
[1] Represents the unrealized loss, net of tax effect of the adoption of ASU No. 27-12, from reclassification of all mortgage backed securities with a carrying value of $424.7 million, from held-to-maturity portfolio into the available for sale portfolio. |
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents reclassifications out of accumulated other comprehensive income for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount reclassified out of accumulated other comprehensive income Year Ended December 31, | | Affected Line Item in Consolidated Statement of Operations |
|
| 2021 | | 2020 | | 2019 | |
| (In thousands) | | |
Cash flow hedges: | | | | | | | |
Interest-rate contracts | $ | 1,641 | | | $ | 1,988 | | | $ | 1,866 | | | Net interest expense |
Available-for-sale securities: | | | | | | | |
Gain on sale of investments | 19 | | | 4,728 | | | 8,274 | | | Net gain on sale of securities |
Tax effect from changes in tax rates | 6 | | | 2 | | | (37) | | | Income tax expense |
| $ | 1,666 | | | $ | 6,718 | | | $ | 10,103 | | | |