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Loans

6 Months Ended

Jun. 30, 2020

NOTE 5 - LOANS

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

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

	June 30, 2020
	Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	857,552	$	270,555	$	1,128,107
Other commercial and industrial		735,511		115,234		850,745
Commercial Paycheck Protection Program (PPP Loans)		278,059		-		278,059
US Loan Program		325,358		-		325,358
		2,196,480		385,789		2,582,269
Mortgage		874,292		1,541,902		2,416,194
Consumer
Personal loans		344,568		2,456		347,024
Credit lines		48,826		489		49,315
Credit cards		65,198		-		65,198
Overdraft		116		-		116
Auto		1,454,987		37,409		1,492,396
		1,913,695		40,354		1,954,049
		4,984,467		1,968,045		6,952,512
Allowance for credit losses		(151,531)		(81,170)		(232,701)
Total loans held for investment		4,832,936		1,886,875		6,719,811
Mortgage loans held for sale		19,432		-		19,432
Total loans, net	$	4,852,368	$	1,886,875	$	6,739,243

At June 30, 2020, and December 31, 2019, Oriental had a carrying balance of $157.4 million and $134.0 million, respectively, in current status, in loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, as part of the institutional commercial loan segment. All loans granted to the Puerto Rico government are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities and one loan to a public corporation acquired in the Scotiabank PR & USVI Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.The tables below present the aging of the amortized cost of loans held for investment at June 30, 2020 and December 31, 2019, by class of loans. Mortgage loans past due include $75.1 million 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.

	June 30, 2020
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	4,052	$	1,446	$	24,748	$	30,246	$	827,306	$	857,552	$	-
Other commercial and industrial		824		1,382		5,803		8,009		1,005,561		1,013,570		-
US Loan Program		-		-		-		-		325,358		325,358		-
		4,876		2,828		30,551		38,255		2,158,225		2,196,480		-
Mortgage		5,413		10,253		100,143		115,809		758,483		874,292		1,704
Consumer
Personal loans		7,829		3,316		1,350		12,495		332,073		344,568		-
Credit lines		1,480		994		818		3,292		45,534		48,826		-
Credit cards		1,256		3,374		2,372		7,002		58,196		65,198		-
Overdraft		-		-		-		-		116		116		-
Auto		51,255		38,570		10,200		100,025		1,354,962		1,454,987		-
		61,820		46,254		14,740		122,814		1,790,881		1,913,695		-
Total loans	$	72,109	$	59,335	$	145,434	$	276,878	$	4,707,589	$	4,984,467	$	1,704

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

	December 31, 2019
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	994	$	946	$	17,495	$	19,435	$	847,271	$	866,706	$	-
Other commercial and industrial		7,584		371		2,716		10,671		712,855		723,526		-
US Loan Program		-		-		-		-		272,595		272,595		-
		8,578		1,317		20,211		30,106		1,832,721		1,862,827		-
Mortgage		9,285		13,105		94,109		116,499		783,096		899,595		2,418
Consumer
Personal loans		4,978		2,123		1,579		8,680		358,477		367,157		-
Credit lines		533		20		221		774		51,840		52,614		-
Credit cards		1,438		417		896		2,751		72,451		75,202		-
Overdraft		51		-		-		51		165		216		-
Auto		72,336		31,412		14,270		118,018		1,350,864		1,468,882		-
		79,336		33,972		16,966		130,274		1,833,797		1,964,071		-
Total loans	$	97,199	$	48,394	$	131,286	$	276,879	$	4,449,614	$	4,726,493	$	2,418

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

	December 31, 2019
		Scotiabank PR & USVI		BBVAPR		Eurobank
	(In thousands)
Contractual required payments receivable:	$	2,147,249	$	1,086,367	$	117,107
Less: Non-accretable discount		294,424		340,466		4,285
Cash expected to be collected		1,852,825		745,901		112,822
Less: Accretable yield		458,885		214,886		34,441
Carrying amount, gross		1,393,940		531,015		78,381
Less: allowance for loan and lease losses		-		17,036		14,458
Carrying amount, net	$	1,393,940	$	513,979	$	63,923

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

	Quarter Ended June 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	226,907	$	37,379	$	180	$	427	$	264,893
Accretion		(6,115)		(2,488)		(139)		(190)		(8,932)
Change in expected cash flows		-		1,375		8		190		1,573
Transfer from (to) non-accretable discount		(3,243)		(1,628)		(6)		(139)		(5,016)
Balance at end of period	$	217,549	$	34,638	$	43	$	288	$	252,518

Non-Accretable Discount Activity:
Balance at beginning of period	$	290,100	$	9,911	$	24,056	$	18,835	$	342,902
Change in actual and expected losses		(1,085)		(635)		21		(164)		(1,863)
Transfer (to) from accretable yield		3,243		1,628		6		139		5,016
Balance at end of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055

	Six-Month Period Ended June 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	232,199	$	36,508	$	243	$	560	$	269,510
Accretion		(12,465)		(5,144)		(355)		(488)		(18,452)
Change in expected cash flows		-		4,640		11		488		5,139
Transfer from (to) non-accretable discount		(2,185)		(1,366)		144		(272)		(3,679)
Balance at end of period	$	217,549	$	34,638	$	43	$	288	$	252,518

Non-Accretable Discount Activity:
Balance at beginning of period	$	291,887	$	10,346	$	24,245	$	18,945	$	345,423
Change in actual and expected losses		(1,814)		(808)		(18)		(407)		(3,047)
Transfer (to) from accretable yield		2,185		1,366		(144)		272		3,679
Balance at end of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055

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

	Quarter Ended June 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	37,022	$	2,260		-	$	-	$	39,282
Accretion		(1,280)		(1,199)		(3)		(17)		(2,499)
Change in expected cash flows		30		910		(10)		31		961
Transfer from (to) non-accretable discount		766		(115)		13		(14)		650
Balance at end of period	$	36,538	$	1,856	$	-	$	-	$	38,394

Non-Accretable Discount Activity:
Balance at beginning of period	$	2,426	$	-	$	-	$	116	$	2,542
Change in actual and expected losses		21		159		13		(12)		181
Transfer (to) from accretable yield		(766)		(159)		(13)		14		(924)
Balance at end of period	$	1,681	$	-	$	-	$	118	$	1,799


	Six-Month Period Ended June 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	38,389	$	3,310		-	$	-	$	41,699
Accretion		(2,631)		(2,364)		(15)		(63)		(5,073)
Change in expected cash flows		(393)		866		(41)		118		550
Transfer from (to) non-accretable discount		1,173		44		56		(55)		1,218
Balance at end of period	$	36,538	$	1,856	$	-	$	-	$	38,394

Non-Accretable Discount Activity:
Balance at beginning of period	$	2,826	$	-	$	-	$	133	$	2,959
Change in actual and expected losses		28		44		56		(70)		58
Transfer (to) from accretable yield		(1,173)		(44)		(56)		55		(1,218)
Balance at end of period	$	1,681	$	-	$	-	$	118	$	1,799

Non-accrual Loans

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


	June 30, 2020
	Nonaccrual with		Nonaccrual with no
	Allowance		Allowance
	for Credit Loss		for Credit Loss
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	11,092	$	26,850
Other commercial and industrial		3,056		3,191
		14,148		30,041
Mortgage		18,142		8,739
Consumer
Personal loans		1,167		570
Personal lines of credit		823		-
Credit cards		2,373		-
Auto and leasing		10,540		-
		14,903		570
Total non-accrual loans	$	47,193	$	39,350

PCD:
Commercial
Commercial secured by real estate	$	12,188	$	3,077
Other commercial and industrial		65,797		-
		77,985		3,077
Mortgage		1,375		-
Consumer
Personal loans		12		-
		12		-
Total non-accrual loans	$	79,372	$	3,077

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

	December 31,
	2019
	(In thousands)
Commercial
Commercial secured by real estate	$	32,720
Other commercial and industrial		9,886
		42,606
Mortgage		18,735
Consumer
Personal loans		4,164
Personal lines of credit		227
Credit cards		896
Auto and leasing		14,295
		19,582
Total non-accrual loans	$	80,923

Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, those loans are included as non-performing loans but excluded from non-accrual loans.

At June 30, 2020 and December 31, 2019, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $105.3 million and $103.7 million, respectively, as they were performing under their new terms.

Modifications

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

	Quarter Ended June 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Consumer	1		21	5.99%	60		20	6.50%	72

	Six-Month Period Ended June 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	26	$	3,093	5.14%	359	$	3,046	4.29%	360
Commercial	1		281	8.00%	105		281	6.00%	240
Consumer	16		220	12.95%	67		225	10.63%	81

	Quarter Ended June 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	50	$	7,000	6.14%	388	$	6,345	5.45%	341
Commercial	1		1,157	7.00%	55		1,157	5.75%	86
Consumer	70		1,052	15.57%	69		1,082	11.56%	74
Auto	13		193	7.58%	70		200	9.18%	46

	Six-Month Period Ended June 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	88		11,494	5.90%	388	$	10,586	5.11%	346
Commercial	2		1,164	7.03%	55		1,164	5.78%	86
Consumer	141		2,015	15.39%	67		2,049	1.70%	74
Auto	13		193	7.58%	70		200	9.18%	46

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

	Twelve-month Period Ended June 30,
	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	17	$	2,267	22	$	2,830
Commercial	-	$	-	3	$	1,935
Consumer	90	$	1,231	66	$	928
Auto	3	$	32	1	$	27

Oriental offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the quarters and six-month periods ended June 30, 2020 and 2019.

TDRs disclosed above were not related to COVID-19 modifications. As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. Oriental executed loan deferrals on outstanding balances of approximately $2.1 billion resulting from the COVID-19 pandemic that were not classified as a TDR at June 30, 2020.

Collateral-dependent Loans

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

	June 30, 2020
	Real Estate		Equipment		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	29,656	$	-	$	29,656
Other commercial and industrial		3,108		-		3,108
Total loans	$	32,764	$	-	$	32,764

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

Oriental categorizes its loans into loan grades based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans.

Oriental uses the following definitions for loan grades:

Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.

Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable and improbable.

Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass loans.

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

	Term Loans												Revolving
	Amortized Cost Basis by Origination Year												Loans
													Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	28,681	$	128,098	$	123,096	$	89,243	$	61,494	$	266,311	$	57,162	$	754,085
Special Mention		10,218		3,065		2,109		17,481		115		22,188		1,539		56,715
Substandard		-		338		893		8,644		609		27,376		8,859		46,719
Doubtful		-		-		-		-		-		-		33		33
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		38,899		131,501		126,098		115,368		62,218		315,875		67,593		857,552
Other commercial and industrial:
Loan grade:
Pass		288,156		104,225		100,426		16,379		9,764		81,412		397,183		997,545
Special Mention		-		59		-		-		6		5,726		3,286		9,077
Substandard		-		811		32		219		2,952		106		2,756		6,876
Doubtful		-		-		-		-		-		-		72		72
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		288,156		105,095		100,458		16,598		12,722		87,244		403,297		1,013,570
US Loan Program:
Loan grade:
Pass		47,733		67,272		118,108		7,211		-		-		44,478		284,802
Special Mention		-		-		35,973		-		-		-		1,250		37,223
Substandard		-		-		-		-		-		-		3,333		3,333
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		47,733		67,272		154,081		7,211		-		-		49,061		325,358
Total commercial loans	$	374,788	$	303,868	$	380,637	$	139,177	$	74,940	$	403,119	$	519,951	$	2,196,480

At June 30, 2020, the balance of revolving loans converted to term loans was $25.0 million.

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

															Revolving Loans
	Term Loans												Revolving		Converted to
	Amortized Cost Basis by Origination Year												Loans		Term Loans
													Amortized		Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Mortgage:
Payment performance:
Performing	$	704	$	22,423	$	34,414	$	36,355	$	42,626	$	707,282	$	-	$	-	$	843,804
Nonperforming		-		150		-		190		566		29,582		-		-		30,488
Total mortgage loans:		704		22,573		34,414		36,545		43,192		736,864		-		-		874,292
Consumer:
Personal loans:
Payment performance:
Performing		51,866		143,803		75,192		39,144		20,273		12,552		-		-		342,830
Nonperforming		184		336		472		124		116		506		-		-		1,738
Total personal loans		52,050		144,139		75,664		39,268		20,389		13,058		-		-		344,568
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		48,003		-		48,003
Nonperforming		-		-		-		-		-		-		823		-		823
Total credit lines		-		-		-		-		-		-		48,826		-		48,826
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		62,825		-		62,825
Nonperforming		-		-		-		-		-		-		2,373		-		2,373
Total credit cards		-		-		-		-		-		-		65,198		-		65,198
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		116		-		116

Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		116		-		116
Total consumer loans		52,050		144,139		75,664		39,268		20,389		13,058		114,140		-		458,708
Total mortgage and consumer loans	$	52,754	$	166,712	$	110,078	$	75,813	$	63,581	$	749,922	$	114,140	$	-	$	1,333,000

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

	Term Loans
	Amortized Cost Basis by Origination Year

	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		41,285		151,696		131,984		78,483		44,457		41,277		489,182
661-699		22,439		94,226		61,715		31,054		17,607		16,402		243,443
700+		50,281		204,107		187,230		101,256		57,571		53,383		653,828
No FICO		9,851		37,871		8,883		5,704		3,391		2,834		68,534
Total auto:	$	123,856	$	487,900	$	389,812	$	216,497	$	123,026	$	113,896	$	1,454,987

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

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial
Commercial secured by real estate	$	866,706	$	762,443	$	55,870	$	48,357	$	36	$	-
Other commercial and industrial		723,526		706,831		6,634		9,960		101		-
US Loan Program		272,595		262,745		9,850		-		-		-
Total Commercial	$	1,862,827	$	1,732,019	$	72,354	$	58,317	$	137	$	-

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss

Retail
Mortgage	$	899,595	$	805,486	$	-	$	94,109	$	-	$	-
Consumer:
Personal loans		367,157		365,579		-		1,578		-		-
Personal lines of credit		52,614		52,393		-		221		-		-
Credit cards		75,202		74,306		-		896		-		-
Overdrafts		216		165		-		51		-		-
Auto		1,468,882		1,454,612		-		14,270		-		-
Total consumer loans		1,964,071		1,947,055		-		17,016		-		-
Total retail loans	$	2,863,666	$	2,752,541	$	-	$	111,125	$	-	$	-