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Loans

9 Months Ended

Sep. 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 September 30, 2020 was as follows:

	September 30, 2020
	Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	810,755	$	248,653	$	1,059,408
Other commercial and industrial		636,610		103,902		740,512
Commercial Paycheck Protection Program (PPP Loans)		289,218		-		289,218
US Loan Program		337,657		-		337,657
		2,074,240		352,555		2,426,795
Mortgage		847,671		1,504,914		2,352,585
Consumer
Personal loans		327,923		1,934		329,857
Credit lines		46,873		402		47,275
Credit cards		59,618		-		59,618
Overdraft		132		-		132
Auto		1,511,829		31,836		1,543,665
		1,946,375		34,172		1,980,547
		4,868,286		1,891,641		6,759,927
Allowance for credit losses		(156,409)		(78,904)		(235,313)
Total loans held for investment		4,711,877		1,812,737		6,524,614
Mortgage loans held for sale		54,526		-		54,526
Total loans, net	$	4,766,403	$	1,812,737	$	6,579,140

At September 30, 2020, and December 31, 2019, Oriental had a carrying balance of $121.9 million and $134.0 million, respectively, in loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, as part of the institutional commercial loan segment. Loans granted to the Puerto Rico government amounting to $97.8 million and $129.9 million at September 30, 2020, and December 31, 2019, respectively, are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities in current status and one loan amounting to $24.1 million and $4.1 million, respectively, to a public corporation acquired in the Scotiabank PR & USVI Acquisition in non-accrual status with an allowance for credit losses of $20.0 million at September 30, 2020. Loans acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were recognized at fair value as of December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.The tables below present the aging of the amortized cost of loans held for investment at September 30, 2020 and December 31, 2019, by class of loans. Mortgage loans past due include $62.7 million and $75.2 million, respectively, of delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

	September 30, 2020
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	2,987	$	749	$	23,984	$	27,720	$	783,035	$	810,755	$	-
Other commercial and industrial		983		432		6,460		7,875		917,953		925,828		-
US Loan Program		-		-		-		-		337,657		337,657		-
		3,970		1,181		30,444		35,595		2,038,645		2,074,240		-
Mortgage		5,793		10,989		96,986		113,768		733,903		847,671		3,666
Consumer
Personal loans		4,984		4,209		2,237		11,430		316,493		327,923		-
Credit lines		999		196		1,249		2,444		44,429		46,873		-
Credit cards		1,104		509		1,561		3,174		56,444		59,618		-
Overdraft		31		-		-		31		101		132		-
Auto		53,782		34,130		21,823		109,735		1,402,094		1,511,829		-
		60,900		39,044		26,870		126,814		1,819,561		1,946,375		-
Total loans	$	70,663	$	51,214	$	154,300	$	276,177	$	4,592,109	$	4,868,286	$	3,666

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

	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 nine-month period ended September 30, 2019:

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	217,549	$	34,638	$	43	$	288	$	252,518
Accretion		(5,876)		(2,379)		(77)		(151)		(8,483)
Change in expected cash flows		-		3,995		5		151		4,151
Transfer from (to) non-accretable discount		(9,849)		(17,128)		57		(94)		(27,014)
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172

Non-Accretable Discount Activity:
Balance at beginning of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055
Change in actual and expected losses		(21,356)		(3,913)		44		(118)		(25,343)
Transfer (to) from accretable yield		9,849		17,128		(57)		94		27,014
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726

	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	232,199	$	36,508	$	243	$	560	$	269,510
Accretion		(18,342)		(7,523)		(432)		(639)		(26,936)
Change in expected cash flows		-		8,635		16		639		9,290
Transfer from (to) non-accretable discount		(12,033)		(18,494)		201		(366)		(30,692)
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172

Non-Accretable Discount Activity:
Balance at beginning of period	$	291,887	$	10,346	$	24,245	$	18,945	$	345,423
Change in actual and expected losses		(23,169)		(4,721)		26		(525)		(28,389)
Transfer (to) from accretable yield		12,033		18,494		(201)		366		30,692
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726

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

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	36,538	$	1,856		-	$	-	$	38,394
Accretion		(1,218)		(1,075)		3		(89)		(2,379)
Change in expected cash flows		1,917		550		(93)		132		2,506
Transfer from (to) non-accretable discount		(2,542)		(438)		90		(43)		(2,933)
Balance at end of period	$	34,695	$	893	$	-	$	-	$	35,588

Non-Accretable Discount Activity:
Balance at beginning of period	$	1,681	$	-	$	-	$	118	$	1,799
Change in actual and expected losses		(2,597)		(438)		90		(73)		(3,018)
Transfer (to) from accretable yield		2,542		438		(90)		43		2,933
Balance at end of period	$	1,626	$	-	$	-	$	88	$	1,714


	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	38,389	$	3,310		-	$	-	$	41,699
Accretion		(3,849)		(3,439)		(12)		(152)		(7,452)
Change in expected cash flows		1,524		1,416		(134)		250		3,056
Transfer from (to) non-accretable discount		(1,369)		(394)		146		(98)		(1,715)
Balance at end of period	$	34,695	$	893	$	-	$	-	$	35,588

Non-Accretable Discount Activity:
Balance at beginning of period	$	2,826	$	-	$	-	$	133	$	2,959
Change in actual and expected losses		(2,569)		(394)		146		(143)		(2,960)
Transfer (to) from accretable yield		1,369		394		(146)		98		1,715
Balance at end of period	$	1,626	$	-	$	-	$	88	$	1,714

Non-accrual Loans

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


	September 30, 2020
	Nonaccrual with		Nonaccrual with no
	Allowance		Allowance
	for Credit Loss		for Credit Loss
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	9,902	$	28,015
Other commercial and industrial		3,806		3,219
		13,708		31,234
Mortgage		23,050		12,883
Consumer
Personal loans		1,826		565
Personal lines of credit		1,253		-
Credit cards		1,562		-
Auto and leasing		22,583		-
		27,224		565
Total non-accrual loans	$	63,982	$	44,682

PCD:
Commercial
Commercial secured by real estate	$	14,566	$	3,068
Other commercial and industrial		60,946		1,051
		75,512		4,119
Mortgage		1,003		-
Consumer
Personal loans		4		-
		4		-
Total non-accrual loans	$	76,519	$	4,119
	$	140,501	$	48,801

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

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

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

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

Modifications

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

	Quarter Ended September 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	22	$	2,438	4.98%	286	$	2,268	4.36%	285
Commercial	1		150	5.50%	12		150	8.00%	36
Consumer	2		32	13.68%	68		32	10.61%	68
Auto	29		187	10.63%	76		187	10.87%	73

	Nine-Month Period Ended September 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	51	$	5,982	5.04%	327	$	5,736	4.34%	329
Commercial	3		581	6.71%	57		581	7.03%	135
Consumer	20		284	13.11%	67		289	10.63%	78
Auto	31		217	10.88%	74		219	11.02%	71

	Quarter Ended September 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	21	$	2,446	5.97%	358	$	2,307	5.25%	345
Commercial	1		81	8.50%	60		81	8.50%	95
Consumer	124		1,818	16.50%	65		1,776	11.68%	75
Auto	8		112	6.96%	71		112	8.60%	43

	Nine-Month Period Ended September 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	109	$	13,940	5.91%	383	$	12,893	5.14%	346
Commercial	3		1,245	7.12%	55		1,245	5.96%	86
Consumer	265		3,833	15.92%	66		3,825	11.69%	75
Auto	21		305	7.35%	70		313	8.97%	45

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

	Twelve-month Period Ended September 30,
	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	17	$	2,394	32	$	4,065
Commercial	1	$	84	2	$	350
Consumer	50	$	627	61	$	710
Auto	-	$	-	3	$	51

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

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

Collateral-dependent Loans

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

	September 30, 2020
	Real Estate
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	29,731
Other commercial and industrial		3,069
Total loans	$	32,800

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

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

	Term Loans												Revolving
	Amortized Cost Basis by Origination Year												Loans
													Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	31,615	$	125,253	$	116,703	$	87,845	$	48,245	$	227,034	$	56,413	$	693,108
Special Mention		10,213		3,048		4,762		16,850		8,621		20,599		6,760		70,853
Substandard		188		398		874		8,738		628		28,478		7,411		46,715
Doubtful		-		-		-		-		-		30		49		79
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		42,016		128,699		122,339		113,433		57,494		276,141		70,633		810,755
Other commercial and industrial:
Loan grade:
Pass		345,220		87,578		97,500		15,175		8,903		15,342		306,602		876,320
Special Mention		301		8,135		-		-		4		5,470		27,984		41,894
Substandard		-		796		168		194		2,912		91		3,385		7,546
Doubtful		-		-		-		-		-		-		68		68
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		345,521		96,509		97,668		15,369		11,819		20,903		338,039		925,828
US Loan Program:
Loan grade:
Pass		57,673		64,563		79,209		7,131		-		-		75,345		283,921
Special Mention		63		1,501		43,101		-		-		-		1,250		45,915
Substandard		-		-		7,821		-		-		-		-		7,821
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		57,736		66,064		130,131		7,131		-		-		76,595		337,657
Total commercial loans	$	445,273	$	291,272	$	350,138	$	135,933	$	69,313	$	297,044	$	485,267	$	2,074,240

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

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

															Revolving Loans
	Term Loans												Revolving		Converted to
	Amortized Cost Basis by Origination Year												Loans		Term Loans
													Amortized		Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Mortgage:
Payment performance:
Performing	$	4,170	$	21,330	$	28,735	$	34,413	$	40,319	$	678,226	$	-	$	-	$	807,193
Nonperforming		-		303		39		626		945		38,565		-		-		40,478
Total mortgage loans:		4,170		21,633		28,774		35,039		41,264		716,791		-		-		847,671
Consumer:
Personal loans:
Payment performance:
Performing		69,033		130,325		66,447		33,686		16,673		9,367		-		-		325,531
Nonperforming		82		543		664		404		326		373		-		-		2,392
Total personal loans		69,115		130,868		67,111		34,090		16,999		9,740		-		-		327,923
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		45,620		-		45,620
Nonperforming		-		-		-		-		-		-		1,253		-		1,253
Total credit lines		-		-		-		-		-		-		46,873		-		46,873
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		58,056		-		58,056
Nonperforming		-		-		-		-		-		-		1,562		-		1,562
Total credit cards		-		-		-		-		-		-		59,618		-		59,618
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		132		-		132
Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		132		-		132
Total consumer loans		69,115		130,868		67,111		34,090		16,999		9,740		106,623		-		434,546
Total mortgage and consumer loans	$	73,285	$	152,501	$	95,885	$	69,129	$	58,263	$	726,531	$	106,623	$	-	$	1,282,217

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

	Term Loans
	Amortized Cost Basis by Origination Year

	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		81,738		123,802		105,596		62,980		34,460		28,443		437,019
661-699		54,684		77,710		49,632		25,131		14,147		12,029		233,333
700+		126,267		222,082		176,364		93,445		52,035		40,791		710,984
No FICO		13,656		43,322		34,291		18,861		10,907		9,456		130,493
Total auto:	$	276,345	$	466,916	$	365,883	$	200,417	$	111,549	$	90,719	$	1,511,829

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	$	-	$	-