Equibles

10-Q

OFG BANCORP (OFG)

10-Q 2021-11-05 For: 2021-09-30
View Original
Added on April 04, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

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

EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 001-12647

OFG Bancorp

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

Principal Executive Offices:

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common shares, par value $1.00 per share OFG New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑No☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☑ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐

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

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

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

49,847,438 common shares ($1.00 par value per share) outstanding as of October 31, 2021

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION Page
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition 3
Unaudited Consolidated Statements of Operations 5
Unaudited Consolidated Statements of Comprehensive Income 7
Unaudited Consolidated Statements of Changes in Stockholders’ Equity 8
Unaudited Consolidated Statements of Cash Flows 9
Notes to Unaudited Consolidated Financial Statements
Note 1 – Significant Accounting Policies 12
Note 2 – Restricted Cash 14
Note 3 – Investment Securities 14
Note 4 – Loans 20
Note 5 – Allowance for Credit Losses 35
Note 6 – Foreclosed Real Estate 38
Note 7 – Servicing Assets 38
Note 8 – Derivatives 40
Note 9 – Core Deposit, customer relationship intangible and other intangibles 41
Note 10 – Accrued Interest Receivable and Other Assets 43
Note 11 – Deposits and Related Interest 44
Note 12 – Borrowings and Related Interest 45
Note 13 – Offsetting of Financial Assets and Liabilities 47
Note 14 – Income Taxes 47
Note 15 – Regulatory Capital Requirements 48
Note 16 – Stockholders’ Equity 50
Note 17 – Accumulated Other Comprehensive Income 51
Note 18 – Earnings per Common Share 54
Note 19 – Guarantees 54
Note 20 – Commitments and Contingencies 55
Note 21 – Operating Leases 57
Note 22 – Fair Value of Financial Instruments 60
Note 23 – Banking and Financial Service Revenues 67
Note 24 – Business Segments 69
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 72
Critical Accounting Policies and Estimates 73
Item 3. Quantitative and Qualitative Disclosures about Market Risk 109
Item 4. Controls and Procedures 114
PART II – OTHER INFORMATION
Item 1. Legal Proceedings 115
Item 1A. Risk Factors 115
Item 3. Default upon Senior Securities 116
Item 4. Mine Safety Disclosures 116
Item 5. Other Information 116
Item 6. Exhibits 117
Signatures 118

FORWARD-LOOKING STATEMENTS

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or “OFG”), including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on OFG’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which by their nature are beyond OFG’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 the rate of growth in the economy and employment levels, as well as general business and economic conditions;

 changes in interest rates, as well as the magnitude of such changes;

 a credit default by municipalities of the government of Puerto Rico;

 amendments to the fiscal plan approved by the Financial Oversight and Management Board for Puerto Rico;

 determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and all of its agencies, including some of its public corporations;

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

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

 the disruption to our operations of a cybersecurity breach, including a ransomware attack or theft of sensitive proprietary or client information;

 the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical infrastructure, which suffered catastrophic damages caused by hurricane Maria in 2017 and earthquakes in 2020;

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

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

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

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

 the performance of the stock and bond markets;

 competition in the financial services industry;

 possible legislative, tax or regulatory changes;

 the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the Covid-19 pandemic and its impact on the United States, Puerto Rico, and/or global economy, financial market conditions and our business, results of operations and financial condition; and

 the impact of the actions taken by federal and local governmental authorities to try and contain the Covid-19 virus and its variants or address the impact of the virus on the United States and Puerto Rico economy, and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers. 1

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

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to OFG as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, OFG assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 2

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

December 31,
2020
ASSETS
Cash and cash equivalents:
Cash and due from banks 2,745,675 $ 2,142,294
Money market investments 9,837 11,908
Total cash and cash equivalents 2,755,512 2,154,202
Restricted cash 179 1,375
Investments:
Trading securities, at fair value, with amortized cost of 432 (December 31, 2020 - 432) 22 22
Investment securities available-for-sale, at fair value, with amortized cost of 497,450
(December 31, 2020, amortized cost 432,176); no allowance for credit losses 509,107 446,438
Investment securities held-to-maturity, at amortized cost, with fair value of 371,827
no allowance for credit losses 375,214 -
Federal Home Loan Bank (FHLB) stock, at cost 7,496 8,278
Other investments 10,434 3,962
Total investments 902,273 458,700
Loans:
Loans held-for-sale, at lower of cost or fair value 52,494 43,935
Loans held for investment, net of allowance for credit losses of 180,872 (December 31, 2020 - 204,809) 6,229,991 6,457,324
Total loans 6,282,485 6,501,259
Other assets:
Foreclosed real estate 13,904 11,596
Accrued interest receivable 56,815 65,547
Deferred tax asset, net 128,663 162,478
Premises and equipment, net 86,981 83,786
Customers' liability on acceptances 24,371 33,349
Servicing assets 48,227 47,295
Goodwill 86,069 86,069
Other intangible assets 38,545 45,896
Operating lease right-of-use assets 30,625 31,383
Other assets 152,216 143,076
Total assets 10,606,865 $ 9,826,011
See notes to unaudited consolidated financial statements

All values are in US Dollars. 3

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2021 AND DECEMBER 31, 2020 (CONTINUED)

December 31,
2020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits 5,531,124 $ 4,613,309
Savings accounts 2,378,211 1,944,415
Time deposits 1,335,054 1,857,916
Total deposits 9,244,389 8,415,640
Borrowings:
Advances from FHLB 62,559 65,561
Subordinated capital notes 36,083 36,083
Other borrowings 375 707
Total borrowings 99,017 102,351
Other liabilities:
Securities purchased but not yet received 31,565 -
Derivative liabilities 1,136 1,712
Acceptances executed and outstanding 24,371 33,349
Operating lease liabilities 32,167 32,566
Accrued expenses and other liabilities 120,555 154,418
Total liabilities 9,553,200 8,740,036
Commitments and contingencies (See Note 26) nil nil
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
(December 31, 2020 - 1,340,000 shares of Series A; 1,380,000 shares of Series B; and 960,000 shares of Series D issued and outstanding) 25 liquidation value - 92,000
Common stock, 1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 49,977,236 shares outstanding (December 31, 2020 - 59,885,234 shares issued;
51,387,071 shares outstanding) 59,885 59,885
Additional paid-in capital 635,808 622,652
Legal surplus 114,485 103,269
Retained earnings 375,729 300,096
Treasury stock, at cost, 9,907,998 shares (December 31, 2020 - 8,498,163 shares) (140,862) (102,949)
Accumulated other comprehensive income, net of tax of 1,901 (December 31, 2020 - 1,529) 8,620 11,022
Total stockholders’ equity 1,053,665 1,085,975
Total liabilities and stockholders’ equity 10,606,865 $ 9,826,011
See notes to unaudited consolidated financial statements

All values are in US Dollars. 4

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands, except per share data)
Interest income:
Loans $ 107,937 $ 112,047 $ 326,209 $ 347,014
Mortgage-backed securities 3,060 1,498 7,657 5,890
Investment securities and other 1,142 1,392 2,718 7,422
Total interest income 112,139 114,937 336,584 360,326
Interest expense:
Deposits 8,691 14,620 31,175 46,685
Securities sold under agreements to repurchase - - - 1,335
Advances from FHLB and other borrowings 450 476 1,361 1,521
Subordinated capital notes 293 308 882 1,091
Total interest expense 9,434 15,404 33,418 50,632
Net interest income 102,705 99,533 303,166 309,694
(Recapture) provision for credit losses (4,997) 13,669 (6,978) 78,496
Net interest income after (recapture) provision for credit losses 107,702 85,864 310,144 231,198
Non-interest income:
Banking service revenue 18,198 16,297 52,939 45,678
Wealth management revenue 7,619 7,272 23,270 20,924
Mortgage banking activities 6,195 3,917 16,303 10,223
Total banking and financial service revenues 32,012 27,486 92,512 76,825
Net gain on:
Sale of securities - - - 4,728
Bargain purchase from Scotiabank acquisition - 3,465 - 7,336
Other non-interest income 505 375 2,603 1,039
Total non-interest income, net 32,517 31,326 95,115 89,928
See notes to unaudited consolidated financial statements

5

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020 (CONTINUED)

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits 33,745 31,955 99,282 102,005
Occupancy, equipment and infrastructure costs 12,078 11,943 37,734 35,220
Electronic banking charges 9,615 8,734 27,163 26,284
Information technology expenses 3,621 5,381 13,407 16,259
Professional and service fees 5,003 3,331 14,938 12,596
Taxes, other than payroll and income taxes 3,257 3,774 10,535 10,123
Insurance 2,530 2,428 7,659 8,667
Foreclosed real estate and other repossessed assets (income) expenses (2,163) 1,323 (1,885) 6,763
Loan servicing and clearing expenses 1,908 2,345 5,690 4,836
Advertising, business promotion, and strategic initiatives 1,646 1,481 4,783 4,643
Communication 1,327 1,117 3,332 2,993
Printing, postage, stationary and supplies 878 1,094 3,037 2,767
Director and investor relations 243 302 867 928
Merger and restructuring charges - 2,681 - 5,991
Pandemic expenses 1,223 2,090 4,523 4,291
Other 4,013 3,465 8,201 11,881
Total non-interest expense 78,924 83,444 239,266 256,247
Income before income taxes 61,295 33,746 165,993 64,879
Income tax expense 19,624 6,308 53,122 13,853
Net income 41,671 27,438 112,871 51,026
Less: dividends on preferred stock - (1,628) (1,255) (4,884)
Income available to common shareholders $ 41,671 $ 25,810 $ 111,616 $ 46,142
Earnings per common share:
Basic $ 0.82 $ 0.50 $ 2.18 $ 0.90
Diluted $ 0.81 $ 0.50 $ 2.15 $ 0.89
Average common shares outstanding and equivalents 51,516 51,527 51,748 51,563
Cash dividends per share of common stock $ 0.12 $ 0.07 $ 0.28 $ 0.21
See notes to unaudited consolidated financial statements

6

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands)
Net income $ 41,671 $ 27,438 $ 112,871 $ 51,026
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale 1,359 661 (2,605) 15,949
Realized gain on sale of securities available-for-sale - - - (4,728)
Unrealized gain (loss) on cash flow hedges 157 181 576 (987)
Other comprehensive income (loss) before taxes 1,516 842 (2,029) 10,234
Income tax effect (496) (162) (373) (958)
Other comprehensive income (loss) after taxes 1,020 680 (2,402) 9,276
Comprehensive income $ 42,691 $ 28,118 $ 110,469 $ 60,302
See notes to unaudited consolidated financial statements

7

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020

Nine-Month Period Ended September 30,
2020 2021 2020
Preferred stock:
Balance at beginning of period 24,000 $ 92,000 $ 92,000 $ 92,000
Redemption of preferred stock (24,000) $ - (92,000) -
Balance at end of period - 92,000 - 92,000
Common stock:
Balance at beginning and end of period 59,885 59,885 59,885 59,885
Additional paid-in capital:
Balance at beginning of period 626,995 621,860 622,652 621,515
Stock-based compensation expense 1,378 144 4,993 1,468
Lapsed restricted stock units (18) (26) (1,967) (1,005)
Redemption of preferred stock, issuance costs 7,453 - 10,130 -
Balance at end of period 635,808 621,978 635,808 621,978
Legal surplus:
Balance at beginning of period 110,235 98,347 103,269 95,779
Transfer from retained earnings 4,250 2,886 11,216 5,454
Balance at end of period 114,485 101,233 114,485 101,233
Retained earnings:
Balance at beginning of period 352,001 264,724 300,096 279,646
Topic 326 adoption - - - (25,494)
Balance at beginning of period (as adjusted for change in accounting principle) 352,001 264,724 300,096 254,152
Net income 41,671 27,438 112,871 51,026
Cash dividends declared on common stock[1] (6,240) (3,595) (14,637) (10,787)
Cash dividends declared on preferred stock - (1,628) (1,255) (4,884)
Transfer to legal surplus (4,250) (2,886) (11,216) (5,454)
Redemption of preferred stock, issuance costs (7,453) - (10,130) -
Balance at end of period 375,729 284,053 375,729 284,053
Treasury stock:
Balance at beginning of period (100,719) (103,121) (102,949) (102,339)
Stock repurchased (40,161) - (40,161) (2,226)
Lapsed restricted stock units and options 18 26 2,248 1,470
Balance at end of period (140,862) (103,095) (140,862) (103,095)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period 7,600 7,588 11,022 (1,008)
Other comprehensive income (loss), net of tax 1,020 680 (2,402) 9,276
Balance at end of period 8,620 8,268 8,620 8,268
Total stockholders’ equity 1,053,665 $ 1,064,322 $ 1,053,665 $ 1,064,322
[1] Dividends declared per common share during the quarter ended September 30, 2021- 0.12 (September 30, 2020 - 0.07). Dividends declared per common share during the nine-month period ended September 30, 2021 - 0.28 (September 30, 2020 - 0.21).
See notes to unaudited consolidated financial statements

All values are in US Dollars. 8

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020

Nine-Month Period Ended September 30,
2021 2020
(In thousands)
Cash flows from operating activities:
Net income $ 112,871 $ 51,026
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value (discounts) premiums on loans 2,044 (7,606)
Amortization of fair value premiums on acquired deposits - (1,955)
Amortization of investment securities premiums, net of accretion of discounts 2,370 4,142
Amortization of other intangible assets 7,351 8,315
Net change in operating leases 359 401
Depreciation and amortization of premises and equipment 10,369 9,382
Deferred income tax expense, net 33,441 12,127
Provision for credit losses (6,978) 78,496
Stock-based compensation 4,993 1,468
Bargain purchase from Scotiabank Acquisition - (7,336)
(Gain) loss on:
Sale of securities - (4,728)
Sale of loans (5,752) (2,202)
Early extinguishment of debt - 63
Foreclosed real estate and other repossessed assets (6,863) 1,078
Sale of other assets (570) (7)
Originations and purchases of loans held-for-sale (284,966) (143,394)
Proceeds from sale of loans held-for-sale 175,955 64,248
Net (increase) decrease in:
Trading securities - 15
Accrued interest receivable 9,101 (29,996)
Servicing assets (932) 3,537
Other assets (8,895) 3,320
Net increase (decrease) in:
Accrued interest on deposits and borrowings (782) (4,038)
Accrued expenses and other liabilities 49,005 13,438
Net cash provided by operating activities 92,121 49,794
See notes to unaudited consolidated financial statements

9

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020 (CONTINUED)

Nine-Month Period Ended September 30,
2021 2020
(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale (28,273) (1,778)
Investment securities held-to-maturity (348,758) -
Other investments (6,472) (1,645)
Maturities and redemptions of:
Investment securities available-for-sale 77,846 389,139
Investment securities held-to-maturity 4,943 -
FHLB stock 782 4,726
Proceeds from sales of:
Investment securities available-for-sale - 320,984
Foreclosed real estate and other repossessed assets, including write-offs 33,669 25,517
Premises and equipment 570 7
Origination and purchase of loans, excluding loans held-for-sale (1,472,546) (1,101,167)
Principal repayment of loans 1,628,577 1,060,606
Additions to premises and equipment (14,151) (11,512)
Outlays for business acquisitions - 402
Net cash (used in) provided by investing activities $ (123,813) $ 685,279
Cash flows from financing activities:
--- --- --- --- ---
Net increase (decrease) in:
Deposits 782,908 915,076
Securities sold under agreements to repurchase - (190,063)
FHLB advances, federal funds purchased, and other borrowings (3,330) (12,361)
Exercise of stock options with treasury shares 281 465
Redemption of preferred stock (92,000) -
Purchase of treasury stock (40,161) (2,226)
Dividends paid on preferred stock (1,255) (4,884)
Dividends paid on common stock (14,637) (10,787)
Net cash provided by financing activities $ 631,806 $ 695,220
Net change in cash, cash equivalents and restricted cash 600,114 1,430,293
Cash, cash equivalents and restricted cash at beginning of period 2,155,577 852,757
Cash, cash equivalents and restricted cash at end of period $ 2,755,691 $ 2,283,050
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Statements of Financial Condition:
Cash and due from banks $ 2,745,675 $ 2,267,383
Money market investments 9,837 14,617
Restricted cash 179 1,050
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 2,755,691 $ 2,283,050
See notes to unaudited consolidated financial statements

10

Nine-Month Period Ended September 30,
2021 2020
(In thousands)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid $ 28,686 $ 40,385
Income taxes paid $ 2,467 $ 5,941
Operating lease liabilities paid $ 8,455 $ 9,747
Mortgage loans held-for-sale securitized into mortgage-backed securities $ 117,051 $ 46,184
Securities purchased but not yet received $ 31,565 $ -
Transfer from loans to foreclosed real estate and other repossessed assets $ 29,947 $ 14,733
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio $ 17,993 $ 261
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio $ 7,053 $ -
Interest capitalized on loans subject to the temporary payment moratorium $ - $ 35,593
Financed sales of foreclosed real estate $ 1,121 $ -
Loans booked under the GNMA buy-back option $ 19,944 $ 62,651
See notes to unaudited consolidated financial statements

11

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – 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, 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”), among other subsidiaries. OFG also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”) through which it issued trust preferred securities. Through its operating subsidiaries and their respective divisions, 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.

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, OFG acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” On December 31, 2019, OFG purchased from the Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets and an assumption of certain liabilities, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. Immediately following the closing of the Scotiabank Acquisition, OFG merged SBPR with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. This transaction is referred to as the “Scotiabank Acquisition.” These acquired businesses have been integrated.

Basis of Presentation

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

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of OFG on a consolidated basis, and all such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Operating results for the nine-months period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC and has recorded or disclosed those material events or transactions as described within the accompanying consolidated financial statements and notes.

Certain reclassifications have been made to prior periods financial statements to conform to the current period presentation. For the nine-month period ended September 30, 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.

Significant Accounting Policies

OFG’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 12

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 2020-04, 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 September 30, 2021, OFG’s total LIBOR-based asset and liabilities exposure represents 5.9% of total consolidated assets, which consists of $491.8 million adjustable rate commercial loans, $42.8 million mortgage loans tied to variable rates, $28.9 million interest rate swaps, $26.2 million interest rate caps and $36.1 million in subordinated capital notes. The manner and impact of the transition from LIBOR to an ARR, as well as the effect of these developments on our loan portfolio, derivatives, asset-liability management, systems, processes, and business, is uncertain.

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

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. OFG does not expect to be materially impacted by this amendment.

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. OFG does not expect to have a material impact by the adoption of this ASU. 13

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 – RESTRICTED CASH

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

September 30, 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 179 1,050
$ 179 $ 1,375

As of 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 nine-month period ended September 30, 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 September 30, 2021 and December 31, 2020, OFG delivered as collateral cash amounting to approximately $179 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 September 30, 2021 was $480.2 million (December 31, 2020 - $408.5 million). At September 30, 2021 and December 31, 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 3 – 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 September 30, 2021 and December 31, 2020, money market instruments included as part of cash and cash equivalents amounted to $9.8 million and $11.9 million, respectively. 14

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 2021 and December 31, 2020, were as follows:

September 30, 2021
Gross Gross Weighted
Amortized Unrealized Unrealized Fair Average
Cost Gains Losses Value Yield
(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
Due from 5 to 10 years $ 93,940 $ 3,219 $ - $ 97,159 1.95%
Due after 10 years 101,017 111 3,012 98,116 1.40%
Total FNMA and FHLMC certificates 194,957 3,330 3,012 195,275 1.67%
GNMA certificates
Due from 1 to 5 years 4,078 137 - 4,215 1.46%
Due from 5 to 10 years 38,961 1,133 - 40,094 1.77%
Due after 10 years 218,249 9,474 204 227,519 2.45%
Total GNMA certificates 261,288 10,744 204 271,828 2.33%
CMOs issued by US government-sponsored agencies
Due from 5 to 10 years 25,127 596 - 25,723 1.80%
Due after 10 years 1,878 24 - 1,902 4.05%
Total CMOs issued by US government-sponsored agencies 27,005 620 - 27,625 1.96%
Total mortgage-backed securities 483,250 14,694 3,216 494,728 2.04%
Investment securities
US Treasury securities
Due less than 1 year 10,738 137 - 10,875 1.49%
Total US Treasury securities 10,738 137 - 10,875 1.49%
Obligations of US government-sponsored agencies
Due less than 1 year 1,275 5 - 1,280 1.40%
Total Obligations of US government-sponsored agencies 1,275 5 - 1,280 1.40%
Other debt securities
Due less than 1 year 250 - - 250 0.65%
Due from 1 to 5 years 1,937 37 - 1,974 5.31%
Total Other debt securities 2,187 37 - 2,224 4.78%
Total investment securities 14,200 179 - 14,379 1.99%
Total securities available for sale $ 497,450 $ 14,873 $ 3,216 $ 509,107 2.04%

15

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Gross Gross Weighted
Unrealized Unrealized Fair Average
Gains Losses Value Yield
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates
Due after 10 years 375,214 $ 34 $ 3,421 $ 371,827 1.73%
Investment securities as of September 30, 2021 include 276.9 million pledged to secure government deposits, assets sold under agreements to repurchase, derivatives and regulatory collateral that the secured parties are not permitted to sell or repledge the collateral, of which 210.5 million serve as collateral for public funds.

All values are in US Dollars. 16

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Gross Gross Weighted
Unrealized Unrealized Fair Average
Gains Losses Value Yield
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 certificates
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, 2020 include 150.8 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.

All values are in US Dollars. 17

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The weighted average yield on debt securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

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 September 30, 2021 and December 31, 2020, most securities held by OFG are issued by U.S. government entities and agencies that have a zero-credit loss assumption.

At both September 30, 2021 and December 31, 2020, the Bank’s international banking entities held short-term US Treasury securities in the amount of $305 thousand and $325 thousand 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 nine-month periods ended September 30, 2021 and 2020, OFG retained securitized GNMA pools totaling $117.1 million and $46.2 million amortized cost, respectively, at a yield of 2.51% and 2.69%, from its own originations.

During the nine-month period ended September 30, 2020, OFG sold $316.3 million available-for-sale mortgage-backed securities and recognized a $4.7 million gain in the sale. There were no sales of securities during the nine-month period ended on September 30, 2021.

Nine-Month Period Ended September 30, 2020
Book Value
Description Sale Price at Sale Gross Gains Gross Losses
(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates $ 229,571 $ 227,213 $ 2,358 $ -
GNMA certificates 91,413 89,043 2,370 -
Total $ 320,984 $ 316,256 $ 4,728 $ -

18

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show OFG’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at September 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

September 30, 2021
Less than 12 months
Amortized Unrealized Fair
Cost Loss Value
(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates $ 97,049 $ 3,012 $ 94,037
GNMA certificates 4,870 204 4,666
$ 101,919 $ 3,216 $ 98,703
Held-to-maturity
FNMA and FHLMC certificates $ 360,150 $ 3,421 $ 356,729
December 31, 2020
--- --- --- --- --- --- ---
Less than 12 months
Amortized Unrealized Fair
Cost Loss 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 September 30, 2021 or December 31, 2020. 19

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 - LOANS

OFG’s loan portfolio is composed of four segments, commercial, mortgage, consumer and auto. 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 September 30, 2021 and December 31, 2020 was as follows:

September 30, 2021 December 31, 2020
Non-PCD PCD Total Non-PCD PCD Total
(In thousands) (In thousands)
Commercial loans:
Commercial secured by<br><br>real estate $ 809,107 $ 210,538 $ 1,019,645 $ 807,284 $ 243,229 $ 1,050,513
Other commercial and<br><br>industrial 722,859 29,016 751,875 647,444 39,931 687,375
Commercial Paycheck<br><br>Protection Program<br><br>(PPP Loans) 136,698 - 136,698 289,218 - 289,218
US commercial loans 422,838 - 422,838 374,904 - 374,904
2,091,502 239,554 2,331,056 2,118,850 283,160 2,402,010
Mortgage 751,389 1,270,854 2,022,243 847,102 1,459,932 2,307,034
Consumer:
Personal loans 310,488 623 311,111 313,257 1,043 314,300
Credit lines 15,673 336 16,009 20,146 351 20,497
Credit cards 47,292 - 47,292 56,185 - 56,185
Overdraft 219 - 219 305 - 305
Auto 1,667,113 15,820 1,682,933 1,534,269 27,533 1,561,802
2,040,785 16,779 2,057,564 1,924,162 28,927 1,953,089
4,883,676 1,527,187 6,410,863 4,890,114 1,772,019 6,662,133
Allowance for credit losses (138,874) (41,998) (180,872) (161,015) (43,794) (204,809)
Total loans held for investment 4,744,802 1,485,189 6,229,991 4,729,099 1,728,225 6,457,324
Mortgage loans held for sale 35,031 - 35,031 41,654 - 41,654
Other loans held for sale 17,463 - 17,463 2,281 - 2,281
Total loans held for sale 52,494 - 52,494 43,935 - 43,935
Total loans, net $ 4,797,296 $ 1,485,189 $ 6,282,485 $ 4,773,034 $ 1,728,225 $ 6,501,259

At September 30, 2021 and December 31, 2020, OFG had carrying balances of $87.1 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 institutional commercial loan segment. The Bank’s loans to the Puerto Rico government amounting to $86.0 million and $98.0 million at September 30, 2021 and December 31, 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. 20

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The tables below present the aging of the amortized cost of loans held for investment at September 30, 2021 and December 31, 2020, by class of loans. Mortgage loans past due include $19.9 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.

September 30, 2021
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 $ 2,745 $ 51 $ 8,630 $ 11,426 $ 797,681 $ 809,107 $ -
Other commercial and industrial 662 463 962 2,087 857,470 859,557 -
US commercial loans 229 - - 229 422,609 422,838 -
3,636 514 9,592 13,742 2,077,760 2,091,502 -
Mortgage 8,364 6,877 62,860 78,101 673,288 751,389 3,078
Consumer
Personal loans 2,442 1,143 1,110 4,695 305,793 310,488 -
Credit lines 331 87 312 730 14,943 15,673 -
Credit cards 717 207 577 1,501 45,791 47,292 -
Overdraft 58 - 3 61 158 219 -
Auto 51,371 24,891 11,411 87,673 1,579,440 1,667,113 -
54,919 26,328 13,413 94,660 1,946,125 2,040,785 -
Total loans $ 66,919 $ 33,719 $ 85,865 $ 186,503 $ 4,697,173 $ 4,883,676 $ 3,078

21

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

December 31, 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 $ 2,781 $ 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 -
Auto 57,176 31,181 20,485 108,842 1,425,427 1,534,269 -
64,501 34,849 24,638 123,988 1,800,174 1,924,162 -
Total loans $ 80,035 $ 50,933 $ 149,486 $ 280,454 $ 4,609,660 $ 4,890,114 $ 3,974

Upon adoption of Current Expected Credit Losses accounting standard (“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. 22

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020
Nonaccrual with Nonaccrual with no Nonaccrual with Nonaccrual with no
Allowance Allowance Allowance Allowance
for Credit Loss for Credit Loss Total for Credit Loss for Credit Loss Total
(In thousands) (In thousands)
Non-PCD:
Commercial
Commercial secured<br><br>by real estate $ 6,906 $ 19,520 $ 26,426 $ 15,225 $ 21,462 $ 36,687
Other commercial and<br><br>industrial 1,704 343 2,047 2,138 3,174 5,312
8,610 19,863 28,473 17,363 24,636 41,999
Mortgage 20,112 22,280 42,392 25,683 17,747 43,430
Consumer
Personal loans 1,006 305 1,311 1,752 377 2,129
Personal lines of credit 312 - 312 509 - 509
Credit cards 577 - 577 1,586 - 1,586
Auto and leasing 12,054 1 12,055 20,766 - 20,766
13,949 306 14,255 24,613 377 24,990
Total non-accrual<br><br>loans $ 42,671 $ 42,449 $ 85,120 $ 67,659 $ 42,760 $ 110,419
PCD:
Commercial
Commercial secured<br><br>by real estate $ 28,334 $ 7,319 $ 35,653 $ 31,338 $ 4,031 $ 35,369
Other commercial and<br><br>industrial 1,103 42 1,145 1,102 - 1,102
29,437 7,361 36,798 32,440 4,031 36,471
Mortgage 2,030 - 2,030 1,003 - 1,003
Consumer
Personal loans - - - 1 - 1
- - - 1 - 1
Total non-accrual<br><br>loans $ 31,467 $ 7,361 $ 38,828 $ 33,444 $ 4,031 $ 37,475
$ 74,138 $ 49,810 $ 123,948 $ 101,103 $ 46,791 $ 147,894

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. 23

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At September 30, 2021 and December 31, 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 $122.5 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. 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 $2.1 million and $7.7 million at September 30, 2021 and December 31, 2020, respectively.

The following table presents the troubled-debt restructurings in all loan portfolios as of September 30, 2021 and December 31, 2020.

September 30, 2021
Related
Accruing Non-accruing Total Allowance
(In thousands)
Commercial
Commercial secured by real estate $ 11,285 $ 14,606 $ 25,891 $ 304
US commercial loans 7,156 - 7,156 176
Other commercial and industrial 3,038 337 3,375 46
21,479 14,943 36,422 526
Mortgage 97,113 11,420 108,533 4,214
Consumer
Personal loans 3,662 201 3,863 182
Auto and leasing 246 22 268 17
3,908 223 4,131 199
Total loans $ 122,500 $ 26,586 $ 149,086 $ 4,939
December 31, 2020
--- --- --- --- --- --- --- --- ---
Related
Accruing Non-accruing Total Allowance
(In thousands)
Commercial
Commercial secured by real estate $ 10,047 $ 16,609 $ 26,656 $ 223
US commercial loans 7,157 - 7,157 345
Other commercial and industrial 3,872 375 4,247 59
21,076 16,984 38,060 627
Mortgage 87,539 11,202 98,741 4,882
Consumer
Personal loans 4,944 67 5,011 257
Auto and leasing 331 44 375 23
5,275 111 5,386 280
Total loans $ 113,890 $ 28,297 $ 142,187 $ 5,789

24

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the troubled-debt restructurings by loan portfolios and modification type as of September 30, 2021 and December 31, 2020.

September 30, 2021
Combination of reduction
Reduction in Maturity or term in interest rate
interest rate extension and extension of maturity Forbearance Total
(In thousands)
Commercial
Commercial secured by real estate $ 861 $ 1,289 $ 20,467 $ 3,274 $ 25,891
US commercial loans 7,156 - - - 7,156
Other commercial and industrial 693 2,123 529 30 3,375
8,710 3,412 20,996 3,304 36,422
Mortgage 33,309 7,237 32,761 35,226 108,533
Consumer
Personal loans 1,789 312 1,528 234 3,863
Auto and leasing 77 - 31 160 268
1,866 312 1,559 394 4,131
Total loans $ 43,885 $ 10,961 $ 55,316 $ 38,924 $ 149,086
December 31, 2020
Combination of reduction
Reduction in Maturity or term in interest rate
interest rate extension and extension of maturity Forbearance Total
(In thousands)
Commercial
Commercial secured by real estate $ 740 $ 3,926 $ 21,990 $ - $ 26,656
US commercial loans 7,157 - - - 7,157
Other commercial and industrial 718 2,960 569 - 4,247
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
2,353 407 1,934 692 5,386
Total loans $ 38,561 $ 13,564 $ 54,227 $ 35,835 $ 142,187

25

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 both December 31, 2019 and at the time of implementation of the modification program, and the borrowers met other applicable criteria. As of September 30, 2021 and December 31, 2020 there were $46.5 million and $95.7 million, respectively, of loans deferred as a result of the Covid-19 pandemic that were not classified as a TDR, which consist of commercial loans in the hospitality industry and FHA and VA insured mortgage loans.

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.

Loan modifications that are considered TDR loans completed during the quarters and nine-month periods ended September 30, 2021 and 2020 were as follows:

Quarter Ended September 30, 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 40 $ 5,691 4.52% 349 $ 5,845 3.52% 350
Consumer 5 77 16.64% 67 77 12.19% 81
Auto 1 22 6.75% 84 22 6.00% 48
Nine-Month Period Ended September 30, 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 110 $ 14,352 4.29% 321 $ 14,305 3.57% 346
Commercial 3 1,176 4.72% 157 1,085 5.95% 60
Consumer 14 232 13.97% 69 233 10.40% 77
Auto 9 148 8.70% 72 148 9.35% 49

26

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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
Consumer 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 27

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents troubled-debt restructurings for which there was a payment default during the twelve-month periods ended September 30, 2021 and 2020:

Twelve month period ended September 30,
2021 2020
Number of Contracts Recorded Investment Number of Contracts Recorded Investment
(Dollars in thousands)
Mortgage 23 $ 2,569 17 $ 2,394
Commercial - $ - 1 $ 84
Consumer 2 $ 24 50 $ 627

As of September 30, 2021, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $24.6 million. 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 territories’ courts. Foreclosure timelines vary according to local law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays and title issues.

Collateral-dependent Loans

The table below present the amortized cost of collateral-dependent loans held for investment at September 30, 2021 and December 31, 2020, by class of loans.

September 30, 2021 December 31, 2020
(In thousands)
Commercial loans:
Commercial secured by real estate $ 10,439 $ 29,279

PCD loans, except for single pooled loans, are not included in the table above as their unit of account is the loan pool. 28

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. 29

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of September 30, 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 Revolving
Amortized Cost Basis by Origination Year Loans
Amortized
2021 2020 2019 2018 2017 Prior Cost Basis Total
(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass $ 80,537 $ 121,695 $ 95,742 $ 102,357 $ 56,184 $ 196,155 $ 37,427 $ 690,097
Special Mention 662 637 51,735 3,964 12,212 4,327 2,195 75,732
Substandard 832 10,703 57 870 8,259 20,447 1,343 42,511
Doubtful - - - - - 23 744 767
Loss - - - - - - - -
Total commercial secured by real estate 82,031 133,035 147,534 107,191 76,655 220,952 41,709 809,107
Other commercial and industrial:
Loan grade:
Pass 291,626 105,885 51,320 61,434 10,038 6,299 319,053 845,655
Special Mention 21 66 7,542 155 14 - 3,936 11,734
Substandard 405 21 209 421 70 26 961 2,113
Doubtful - - - - - - 55 55
Loss - - - - - - - -
Total other commercial and industrial: 292,052 105,972 59,071 62,010 10,122 6,325 324,005 859,557
US commercial loans:
Loan grade:
Pass 83,239 61,198 47,191 55,605 - - 130,408 377,641
Special Mention - - 1,516 26,849 - - - 28,365
Substandard - 7,156 - 9,676 - - - 16,832
Doubtful - - - - - - - -
Loss - - - - - - - -
Total US commercial loans: 83,239 68,354 48,707 92,130 - - 130,408 422,838
Total commercial loans $ 457,322 $ 307,361 $ 255,312 $ 261,331 $ 86,777 $ 227,277 $ 496,122 $ 2,091,502

30

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2020 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
2020 2019 2018 2017 2016 Prior Cost Basis Total
(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
Total US commercial loans 75,844 63,765 128,597 7,124 - - 99,574 374,904
Total Commercial $ 585,352 $ 282,330 $ 336,006 $ 123,822 $ 64,241 $ 225,480 $ 501,619 $ 2,118,850

At September 30, 2021 and December 31, 2020, the balance of revolving loans converted to term loans was $17.8 million and $21.0 million, respectively. 31

OFG BANCORP

NOTES TO UNAUDITED 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 tables presents the amortized cost in mortgage and consumer loans based on payment activity as of September 30, 2021:

Revolving Loans
Term Loans Revolving Converted to
Amortized Cost Basis by Origination Year Loans Term Loans
Amortized Amortized
2021 2020 2019 2018 2017 Prior Cost Basis Cost Basis Total
(In thousands)
Mortgage:
Payment performance:
Performing $ 15,422 $ 16,534 $ 15,722 $ 19,934 $ 25,483 $ 606,682 $ - $ - $ 699,777
Nonperforming - 126 329 315 1,890 48,952 - - 51,612
Total mortgage loans: 15,422 16,660 16,051 20,249 27,373 655,634 - - 751,389
Consumer:
Personal loans:
Payment performance:
Performing 106,438 63,963 77,261 36,185 15,855 9,475 - - 309,177
Nonperforming 187 149 318 207 43 407 - - 1,311
Total personal loans 106,625 64,112 77,579 36,392 15,898 9,882 - - 310,488
Credit lines:
Payment performance:
Performing - - - - - - 15,361 - 15,361
Nonperforming - - - - - - 312 - 312
Total credit lines - - - - - - 15,673 - 15,673
Credit cards:
Payment performance:
Performing - - - - - - 46,715 - 46,715
Nonperforming - - - - - - 577 - 577
Total credit cards - - - - - - 47,292 - 47,292
Overdrafts:
Payment performance:
Performing - - - - - - 219 - 219
Nonperforming - - - - - - - - -
Total overdrafts - - - - - - 219 - 219
Total consumer loans 106,625 64,112 77,579 36,392 15,898 9,882 63,184 - 373,672
Total mortgage and consumer loans $ 122,047 $ 80,772 $ 93,630 $ 56,641 $ 43,271 $ 665,516 $ 63,184 $ - $ 1,125,061

32

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables presents the amortized cost in mortgage and consumer loans based on payment activity as of December 31, 2020:

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 $ 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

33

OFG BANCORP

NOTES TO UNAUDITED 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 September 30, 2021 and December 31, 2020:

Term Loans
Amortized Cost Basis by Origination Year
As of September 30, 2021
2021 2020 2019 2018 2017 Prior Total
(In thousands)
Auto:
FICO score:
1-660 121,947 100,243 86,861 73,485 41,998 28,836 453,370
661-699 99,168 80,757 53,171 36,727 19,139 13,347 302,309
700+ 186,415 183,076 199,477 145,310 70,449 48,066 832,793
No FICO 25,113 14,053 18,215 11,050 6,119 4,091 78,641
Total auto: $ 432,643 $ 378,129 $ 357,724 $ 266,572 $ 137,705 $ 94,340 $ 1,667,113
Term Loans
Amortized Cost Basis by Origination Year
As of December 31, 2020
2020 2019 2018 2017 2016 Prior Total
(In thousands)
Auto:
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: $ 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. 34

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

On January 1, 2020, OFG adopted CECL, which 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.

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.

At September 30, 2021, OFG used a probability weighted scenario approach using Moody’s Economic Forecast Scenarios as it is expected that Puerto Rico’s economic performance should be close to the baseline scenario, and to a lesser extent to the S3 (pessimistic) scenario. In addition, the allowance for credit losses at September 30, 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. 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. 35

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the activity in OFG’s allowance for credit losses by segment for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30, 2021
Commercial Mortgage Consumer Auto Total
(In thousands)
Non-PCD:
Balance at beginning of period $ 43,523 $ 16,368 $ 19,065 $ 69,358 $ 148,314
(Recapture) provision for credit losses (3,323) 240 259 676 (2,148)
Charge-offs (7,518) (160) (2,370) (4,989) (15,037)
Recoveries 558 419 894 5,874 7,745
Balance at end of period $ 33,240 $ 16,867 $ 17,848 $ 70,919 $ 138,874
PCD:
Balance at beginning of period $ 12,756 $ 30,108 $ 38 $ 501 $ 43,403
(Recapture) provision for credit losses (2,838) 649 (220) (237) (2,646)
Charge-offs (68) (1,008) - (124) (1,200)
Recoveries 1,316 641 219 265 2,441
Balance at end of period $ 11,166 $ 30,390 $ 37 $ 405 $ 41,998
Total allowance for credit losses at end of period $ 44,406 $ 47,257 $ 17,885 $ 71,324 $ 180,872
Nine-Month Period Ended September 30, 2021
--- --- --- --- --- --- --- --- --- --- ---
Commercial Mortgage Consumer Auto Total
(In thousands)
Non-PCD:
Balance at beginning of period $ 45,779 $ 19,687 $ 25,253 $ 70,296 $ 161,015
(Recapture) provision for credit losses (6,284) (2,831) 174 2,177 (6,764)
Charge-offs (8,238) (1,216) (9,736) (19,242) (38,432)
Recoveries 1,983 1,227 2,157 17,688 23,055
Balance at end of period $ 33,240 $ 16,867 $ 17,848 $ 70,919 $ 138,874
PCD:
Balance at beginning of period $ 16,405 $ 26,389 $ 57 $ 943 $ 43,794
(Recapture) provision for credit losses (7,304) 8,370 (272) (694) 100
Charge-offs (118) (5,340) (22) (806) (6,286)
Recoveries 2,183 971 274 962 4,390
Balance at end of period $ 11,166 $ 30,390 $ 37 $ 405 $ 41,998
Total allowance for credit losses at end of period $ 44,406 $ 47,257 $ 17,885 $ 71,324 $ 180,872

36

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Quarter ended September 30, 2020
Commercial Mortgage Consumer Auto and Leasing Total
(In thousands)
Non-PCD:
Balance at beginning of period $ 43,011 $ 19,973 $ 31,954 $ 56,569 $ 151,507
(Recapture) Provision for credit losses (1,771) (564) (378) 16,071 13,358
Charge-offs (298) (56) (5,114) (10,123) (15,591)
Recoveries 253 269 663 5,950 7,135
Balance at end of period $ 41,195 $ 19,622 $ 27,125 $ 68,467 $ 156,409
PCD:
Balance at beginning of period $ 48,913 $ 30,920 $ 169 $ 1,192 $ 81,194
Provision (recapture) for credit losses (1,262) 1,077 - 9 (176)
Charge-offs (293) (1,677) (61) (474) (2,505)
Recoveries 91 89 - 211 391
Balance at end of period $ 47,449 $ 30,409 $ 108 $ 938 $ 78,904
Total allowance for loan and lease losses at end of period $ 88,644 $ 50,031 $ 27,233 $ 69,405 $ 235,313
Nine-Month Period Ended September 30, 2020
--- --- --- --- --- --- --- --- --- --- ---
Commercial Mortgage Consumer Auto and Leasing Total
(In thousands)
Non-PCD:
Balance at beginning of period $ 25,993 $ 8,727 $ 18,446 $ 31,878 $ 85,044
Impact of ASC 326 adoption 3,562 10,980 8,418 16,238 39,198
Provision for credit losses 13,799 47 13,827 43,261 70,934
Charge-offs (4,566) (659) (15,316) (36,476) (57,017)
Recoveries 2,407 527 1,750 13,566 18,250
Balance at end of period $ 41,195 $ 19,622 $ 27,125 $ 68,467 $ 156,409
PCD:
Balance at beginning of period $ 8,893 $ 21,655 $ - $ 947 $ 31,495
Impact of ASC 326 adoption 42,143 7,830 181 368 50,522
(Recapture) provision for credit losses (1,303) 9,131 356 289 8,473
Charge-offs (3,036) (8,998) (521) (1,449) (14,004)
Recoveries 752 791 92 783 2,418
Balance at end of period $ 47,449 $ 30,409 $ 108 $ 938 $ 78,904
Total allowance for loan and lease losses at end of period $ 88,644 $ 50,031 $ 27,233 $ 69,405 $ 235,313

37

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 — FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands)
Balance at beginning of period $ 15,093 $ 24,792 $ 11,596 $ 29,909
Additions 4,842 613 14,386 2,560
Sales (5,978) (5,209) (11,499) (11,250)
Decline in value (53) (740) (579) (1,763)
Balance at end of period $ 13,904 $ 19,456 $ 13,904 $ 19,456

NOTE 7 - SERVICING ASSETS

At September 30, 2021, the servicing asset amounted to $48.2 million ($47.3 million — December 31, 2020) related to mortgage servicing rights. The impact of Covid-19 has been considered in the fair value for quarter and nine-month period ended September 30, 2021.

The following table presents the changes in servicing rights measured using the fair value method for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands)
Fair value at beginning of period $ 47,712 $ 47,926 $ 47,295 $ 50,779
Servicing from mortgage securitizations or asset transfers 1,339 656 4,782 1,236
Changes due to payments on loans^[1]^ (1,740) (1,365) (5,109) (2,810)
Changes in fair value due to changes in valuation model inputs or assumptions 916 25 1,259 (1,963)
Fair value at end of period $ 48,227 $ 47,242 $ 48,227 $ 47,242
[1] Represents changes due to collection/realization of expected cash flows over time.

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the nine-month periods ended September 30, 2021 and 2020:

Nine-Month Period Ended September 30,
2021 2020
Constant prepayment rate 4.37% - 21.09% 5.02% - 25.8%
Discount rate 10.00% - 15.50% 10.00% - 15.50%

38

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

September 30, 2021
(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset $ 48,227
Constant prepayment rate
Decrease in fair value due to 10% adverse change $ 1,059
Decrease in fair value due to 20% adverse change $ (1,021)
Discount rate
Decrease in fair value due to 10% adverse change $ (2,139)
Decrease in fair value due to 20% adverse change $ (4,116)

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.

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 quarters ended September 30, 2021 and 2020 totaled $5.4 million and $4.5 million, respectively. Servicing fees on mortgage loans for the nine-months periods ended September 30, 2021 and 2020 totaled $15.9 million and $13.4 million, respectively. 39

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8 — DERIVATIVES

The following table presents OFG’s derivatives at September 30, 2021 and December 31, 2020:

September 30, December 31,
2021 2020
(In thousands)
Derivative liabilities:
Interest rate swaps designated as cash flow hedges $ 1,136 $ 1,712

Interest Rate Swaps

OFG enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix OFG’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions and are properly documented as such; and therefore, these swaps qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the cash flow hedges is recognized in other comprehensive income and is subsequently reclassified into operations in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, OFG does not expect to reclassify any amount included in other comprehensive income related to these interest rate swaps to operations in the next twelve months.

The following table shows a summary of these swaps and their terms at September 30, 2021:

Notional Fixed Variable Trade Settlement Maturity
Type Amount Rate Rate Index Date Date Date
(In thousands)
Interest Rate Swaps $ 28,933 2.4210% 1-Month LIBOR 07/03/13 07/03/13 08/01/23
$ 28,933

Accumulated unrealized losses of $1.1 million and $1.7 million were recognized in accumulated other comprehensive income related to the valuation of these swaps at September 30, 2021 and December 31, 2020, respectively, and the related liability is being reflected in the consolidated statements of financial condition.

Interest Rate Caps

OFG has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, OFG simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market through earnings. As of September 30, 2021 and December 31, 2020, the outstanding total notional amount of interest rate caps was $26.2 million and $40.4 million, respectively. At both September 30, 2021 and December 31, 2020, the interest rate caps sold to clients represented a liability with zero value. At both September 30, 2021 and December 31, 2020, the interest rate caps purchased as mirror-images represented an asset of zero value. 40

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2021 and December 31, 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 24 for the definition of OFG’s reportable business segments). There were no changes in the carrying amount of goodwill as of September 30, 2021 and December 31, 2020.

Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank Acquisition is not amortized to expense but is tested at least annually for impairment. No goodwill was recorded in connection with the Scotiabank Acquisition. OFG performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing basis.

Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, 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.

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, 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 quarter of 2020 using October 31, 2020, respectively, as the annual evaluation date and concluded that there was no impairment at 2020. There were no additional events that caused OFG to perform interim testing during the nine-month period ended September 30, 2021.

The following table reflects the components of other intangible assets subject to amortization at September 30, 2021 and December 31, 2020:

Gross Net
Carrying Accumulated Carrying
Amount Amortization Value
(In thousands)
September 30, 2021
Core deposit intangibles $ 51,402 $ 21,934 $ 29,468
Customer relationship intangibles 17,753 8,819 8,934
Other intangibles 567 424 143
Total other intangible assets $ 69,722 $ 31,177 $ 38,545
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

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 quarters ended September 30, 2021 and 2020 was $2.5 million and $2.8 million, respectively. Amortization of other intangible assets for the nine-month periods ended September 30, 2021 and 2020 was $7.4 million and $8.3 million, respectively. 41

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

42

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the estimated amortization of other intangible assets for each of the following periods.

Year Ending December 31, (In thousands)
2021 $ 9,802
2022 8,501
2023 6,898
2024 5,913
2025 4,927
Thereafter 9,855

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at September 30, 2021 and December 31, 2020 consists of the following:

September 30, December 31,
2021 2020
(In thousands)
Loans $ 55,069 $ 64,465
Investments 1,746 1,082
$ 56,815 $ 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 September 30, 2021 and December 31, 2020, the allowance for credit losses for accrued interest receivable for loans that participated in the Covid-19 deferral programs amounted to $342 thousand and $711 thousand, respectively, and is included in accrued interest receivable in the statement of financial condition.

Other assets at September 30, 2021 and December 31, 2020 consist of the following:

September 30, December 31,
2021 2020
(In thousands)
Prepaid expenses $ 65,024 $ 61,332
Other repossessed assets 1,528 1,816
Investment in Statutory Trust 1,083 1,083
Accounts receivable and other assets 84,581 78,845
$ 152,216 $ 143,076

Prepaid expenses amounting to $65.0 million at September 30, 2021, include prepaid municipal, property and income taxes aggregating to $56.8 million. At December 31, 2020 prepaid expenses amounted to $61.3 million, including prepaid municipal, property and income taxes aggregating to $54.3 million.

Other repossessed assets totaled $1.5 million and $1.8 million at September 30, 2021 and December 31, 2020, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value. 43

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11— DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of September 30, 2021 and December 31, 2020 consist of the following:

September 30, December 31,
2021 2020
(In thousands)
Non-interest bearing demand deposits $ 2,695,993 $ 2,259,048
Interest-bearing savings and demand deposits 5,213,342 4,274,586
Retail certificates of deposit 1,087,160 1,540,406
Institutional certificates of deposit 236,528 292,485
Total core deposits 9,233,023 8,366,525
Brokered deposits 11,366 49,115
Total deposits $ 9,244,389 $ 8,415,640

Brokered deposits include $11.4 million in certificates of deposits at September 30, 2021, and $25.0 million in certificates of deposits and $24.1 million in money market accounts at December 31, 2020. During the nine-month period ended on September 30, 2021, money market accounts were reclassified from brokered deposits to interest-bearing savings accounts as a result of an FDIC exemption from the brokered deposit definition. At September 30, 2021, these money market accounts amounted to $23.3 million.

At September 30, 2021 and December 31, 2020, the aggregate amount of uninsured deposits was $3.896 billion and $3.179 billion, respectively.

The weighted average interest rate of OFG’s deposits was 0.54% and 0.80%, respectively, at September 30, 2021 and December 31, 2020. Interest expense for the quarters and nine-month periods ended September 30, 2021 and 2020 was as follows:

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands)
Demand and savings deposits $ 5,767 $ 6,320 $ 18,347 $ 19,528
Certificates of deposit 2,924 8,300 12,828 27,157
$ 8,691 $ 14,620 $ 31,175 $ 46,685

At September 30, 2021 and December 31, 2020, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $413.7 million and $628.4 million, respectively.

At September 30, 2021 and December 31, 2020, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $281.7 million and $218.9 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $290.7 million and $242.8 million at September 30, 2021 and December 31, 2020, respectively. 44

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding accrued interest of approximately $731 thousand and $1.5 million, the scheduled maturities and uninsured amount of certificates of deposit at September 30, 2021 and December 31, 2020 are as follows:

September 30, 2021 Period-end Uninsured
amount amount
(In thousands)
Within one year:
Three months or less $ 260,058 $ 30,995
Over 3 months through 6 months 169,483 26,898
Over 6 months through 1 year 291,306 49,311
720,847 107,204
Over 1 through 2 years 341,319 59,694
Over 2 through 3 years 125,072 27,930
Over 3 through 4 years 74,835 20,121
Over 4 through 5 years 70,841 13,365
Over 5 years 1,409 -
$ 1,334,323 $ 228,314
December 31, 2020 Period-end Uninsured
amount 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 23,799
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 $475 thousand and $1.1 million as of September 30, 2021 and December 31, 2020, respectively.

NOTE 12— 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 September 30, 2021 and December 31, 2020, these advances were secured by mortgage and commercial loans amounting to $762.9 million and $1.159 billion, respectively. Also, at September 30, 2021 and December 31, 2020, OFG had an additional borrowing capacity with the FHLB-NY of $700 million and $814 million, respectively. At September 30, 2021 and December 31, 2020, the weighted average remaining maturity of FHLB’s advances was 13.4 months and 18.2 months, respectively. The original terms of these advances range between one day and seven years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of September 30, 2021. 45

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $91 thousand and $96 thousand at September 30, 2021 and December 31, 2020, respectively:

September 30, 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%) $ 28,933 $ 30,259
Long-term fixed-rate advances from FHLB, with a weighted average interest rate from 2.92% to 3.24% (December 31, 2020 - from 2.92% to 3.24% ) 33,535 35,206
$ 62,468 $ 65,465

Advances from FHLB mature as follows:

September 30, December 31,
2021 2020
(In thousands)
Under 90 days $ 28,933 $ 30,259
Over one to three years 29,396 30,972
Over three to five years 4,139 4,234
$ 62,468 $ 65,465

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at September 30, 2021 and December 31, 2020. 46

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 13 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

OFG’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, OFG’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party custodian pursuant to an account control agreement.

The following table presents the potential effect of rights of set-off associated with OFG’s recognized financial liabilities at September 30, 2021 and December 31, 2020:

September 30, 2021
Gross Amounts Not Offset in the Statement of Financial Condition
Net Amount of
Gross Amounts Liabilities
Offset in the Presented
Gross Amount Statement of in Statement Cash
of Recognized Financial of Financial Financial Collateral Net
Liabilities Condition Condition Instruments Provided Amount
(In thousands)
Derivatives $ 1,136 $ - $ 1,136 $ - $ - $ 1,136
Total $ 1,136 $ - $ 1,136 $ - $ - $ 1,136
December 31, 2020
Gross Amounts Not Offset in the Statement of Financial Condition
Net Amount of
Gross Amounts Liabilities
Offset in the Presented
Gross Amount Statement of in Statement Cash
of Recognized Financial of Financial Financial Collateral Net
Liabilities Condition Condition Instruments Provided Amount
(In thousands)
Derivatives $ 1,712 $ - $ 1,712 $ - - $ 1,712
Total $ 1,712 $ - $ 1,712 $ - $ - $ 1,712

NOTE 14 — INCOME TAXES

OFG is subject to the provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (the “Code”), which imposes a maximum statutory corporate tax rate of 37.5% on a corporation’s net taxable income. Under the Code, all corporations are treated as separate taxable entities and are not entitled to file consolidated tax returns. Such entities are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income earned from all sources pursuant to the Code. 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. 47

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG also has operations in the United States mainland through its wholly owned subsidiary, OPC, a retirement plan administrator based in Florida. In October 2017, OFG expanded its operations in the United States through the Bank’s wholly owned subsidiary, OFG USA. In addition, 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.

At September 30, 2021 and December 31, 2020, OFG’s net deferred tax asset amounted to $128.7 million and $162.5 million, respectively. 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 mainly dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset is deductible, management believes it is more likely than not that OFG will realize the deferred tax asset, net of the existing valuation allowances recorded at September 30, 2021 and December 31, 2020. 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 maintained an effective tax rate lower than the statutory rate for the nine-month periods ended September 30, 2021 and 2020 of 32.0% and 21.4%, respectively; the increase is associated with a higher proportion of exempt income and income taxed at preferential rates in the previous year. The estimated annual effective tax rate was 32.8%, however, the current effective tax rate was 32.0% due to a discrete tax windfall on stock awards and other true up adjustments. The current effective tax rate was lower than statutory tax rates mainly due to the exempt income.

OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At September 30, 2021 and December 31, 2020, unrecognized tax benefits amounted to $780 thousand and $728 thousand, respectively.

Income tax expense for the quarters ended September 30, 2021 and 2020, was $19.6 million and $6.3 million, respectively. Income tax expense for the nine-month periods ended September 30, 2021 and 2020, was $53.1 million and $13.9 million, respectively.

NOTE 15 — 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.

As of September 30, 2021 and December 31, 2020, OFG and the Bank met all capital adequacy requirements to which they are subject. As of September 30, 2021 and December 31, 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. 48

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG’s and the Bank’s actual capital amounts and ratios as of September 30, 2021 and December 31, 2020 are as follows:

Minimum Capital
Requirement (including Minimum to be Well
Actual capital conservation buffer) Capitalized
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
OFG Bancorp Ratios
As of September 30, 2021
Total capital to risk-weighted assets $ 1,053,185 15.28% $ 723,792 10.50% $ 689,325 10.00%
Tier 1 capital to risk-weighted assets $ 966,885 14.03% $ 585,927 8.50% $ 551,460 8.00%
Common equity tier 1 capital to risk-weighted assets $ 931,885 13.52% $ 482,528 7.00% $ 448,062 6.50%
Tier 1 capital to average total assets $ 966,885 9.33% $ 414,708 4.00% $ 518,384 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%
Minimum Capital
--- --- --- --- --- --- --- --- --- ---
Requirement (including Minimum to be Well
Actual capital conservation buffer) Capitalized
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank Ratios
As of September 30, 2021
Total capital to risk-weighted assets $ 1,007,817 14.70% $ 719,898 10.50% $ 685,617 10.00%
Tier 1 capital to risk-weighted assets $ 921,975 13.45% $ 582,774 8.50% $ 548,493 8.00%
Common equity tier 1 capital to risk-weighted assets $ 921,975 13.45% $ 479,932 7.00% $ 445,651 6.50%
Tier 1 capital to average total assets $ 921,975 8.96% $ 411,478 4.00% $ 514,348 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%

49

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 – STOCKHOLDERS’ EQUITY

Preferred Stock and Common Stock

In July 2021, OFG redeemed all of its outstanding Series D preferred stock and, on April 30, 2021, redeemed all of its outstanding Series A and Series B 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 to $92.0 million. At both September 30, 2021 and December 31, 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. As of December 31, 2020, accumulated preferred stock issuance costs charged against additional paid in capital amounted to $10.1 million. At both September 30, 2021 and December 31, 2020, accumulated common stock issuance costs charged against additional paid in capital amounted to $13.6 million.

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 September 30, 2021 and December 31, 2020, the Bank’s legal surplus amounted to $114.5 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 to be held by OFG as treasury shares. During the nine-month period ended September 30, 2021, OFG repurchased 1,684,921 shares under this program for a total of $40.2 million, at an average price of $23.83 per share. During the nine-month period ended September 30, 2020, Oriental purchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share.

At September 30, 2021 the number of shares that may yet be purchased under the $50 million program is estimated at 390,652 and was calculated by dividing the remaining balance of $9.9 million by $25.22 (closing price of OFG’s common stock at September 30, 2021). 50

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The activity in connection with common shares held in treasury by OFG for the nine-months period ended September 30, 2021 and 2020 is set forth below:

Nine-Month Period Ended September 30,
2021 2020
Dollar Dollar
Shares Amount Shares Amount
(In thousands, except shares data)
Beginning of period $ 8,498,163 $ 102,949 8,486,278 $ 102,339
Common shares used upon lapse of restricted stock units and options (275,086) (2,248) (120,630) (1,470)
Common shares repurchased as part of the stock repurchase program 1,684,921 40,161 175,000 2,226
End of period $ 9,907,998 $ 140,862 8,540,648 $ 103,095

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of September 30, 2021 and December 31, 2020 consisted of:

September 30, December 31,
2021 2020
(In thousands)
Unrealized gain on securities available-for-sale which are not<br><br>other-than-temporarily impaired $ 11,657 $ 14,262
Income tax effect of unrealized gain on securities available-for-sale (2,327) (2,170)
Net unrealized gain on securities available-for-sale which are not<br><br>other-than-temporarily impaired 9,330 12,092
Unrealized loss on cash flow hedges (1,136) (1,711)
Income tax effect of unrealized loss on cash flow hedges 426 641
Net unrealized loss on cash flow hedges (710) (1,070)
Accumulated other comprehensive income, net of income taxes $ 8,620 $ 11,022

51

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30,
2021 2020
Net unrealized Net unrealized Accumulated Net unrealized Net unrealized Accumulated
gains on loss on other gains on loss on other
Securities cash flow comprehensive Securities cash flow comprehensive
available-for-sale hedges (loss) income available-for-sale hedges (loss) income
(In thousands)
Beginning balance $ 8,408 $ (808) $ 7,600 $ 8,885 $ (1,297) $ 7,588
Other comprehensive income (loss) before reclassifications 920 (352) 568 566 (363) 203
Amounts reclassified out of accumulated other comprehensive income 2 450 452 1 476 477
Other comprehensive income 922 98 1,020 567 113 680
Ending balance $ 9,330 $ (710) $ 8,620 $ 9,452 $ (1,184) $ 8,268
Nine-Month Period Ended September 30,
2021 2020
Net unrealized Net unrealized Accumulated Net unrealized Net unrealized Accumulated
gains on loss on other gains on loss on other
Securities cash flow comprehensive Securities cash flow comprehensive
available-for-sale hedges (loss) income available-for-sale hedges (loss) income
(In thousands)
Beginning balance $ 12,092 $ (1,070) $ 11,022 $ (441) $ (567) $ (1,008)
Other comprehensive (loss) income before reclassifications (2,767) (1,001) (3,768) 5,165 (2,142) 3,023
Amounts reclassified out of accumulated other comprehensive income 5 1,361 1,366 4,728 1,525 6,253
Other comprehensive (loss) income (2,762) 360 (2,402) 9,893 (617) 9,276
Ending balance $ 9,330 $ (710) $ 8,620 $ 9,452 $ (1,184) $ 8,268

52

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters and nine-month periods ended September 30, 2021 and 2020:

Amount reclassified out of accumulated other comprehensive income Affected Line Item in Consolidated Statement of Operations
Quarter Ended September 30,
2021 2020
(In thousands)
Cash flow hedges:
Interest-rate contracts $ 450 $ 476 Net interest expense
Available-for-sale securities:
Gain on sale of investments - - Net gain on sale of securities
Tax effect from changes in tax rates 2 1 Income tax expense
$ 452 $ 477
Amount reclassified out of accumulated other comprehensive income Affected Line Item in Consolidated Statement of Operations
Nine-Month Period Ended September 30,
2021 2020
(In thousands)
Cash flow hedges:
Interest-rate contracts $ 1,361 $ 1,525 Net interest expense
Available-for-sale securities:
Gain on sale of investments - 4,728 Net gain on sale of securities
Tax effect from changes in tax rates 5 1 Income tax expense
$ 1,366 $ 6,254

53

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 18 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters and nine-month periods ended September 30, 2021 and 2020 is as follows:

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands, except per share data)
Net income $ 41,671 $ 27,438 $ 112,871 $ 51,026
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D) - (1,628) (1,255) (4,884)
Income available to common shareholders $ 41,671 $ 25,810 $ 111,616 $ 46,142
Average common shares outstanding $ 51,063 $ 51,342 $ 51,364 $ 51,361
Effect of dilutive securities:
Average potential common shares-options 453 185 384 202
Total weighted average common shares outstanding and equivalents $ 51,516 $ 51,527 $ 51,748 $ 51,563
Earnings per common share - basic $ 0.82 $ 0.50 $ 2.18 $ 0.90
Earnings per common share - diluted $ 0.81 $ 0.50 $ 2.15 $ 0.89

For the quarter ended September 30, 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 132. For the quarter ended September 30, 2021, there were no weighted-average stock options with an anti-dilutive effect on earnings per share. For the nine-month periods ended September 30, 2021 and 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 3,075 and 8,105, respectively.

NOTE 19 – GUARANTEES

At September 30, 2021 and December 31, 2020, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit was $33.9 million and $19.5 million, respectively.

OFG has a liability for residential mortgage loans sold subject to credit recourse pursuant to GNMA’s and FNMA’s residential mortgage loan sales and securitization programs. At September 30, 2021 and December 31, 2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $124.9 million and $135.3 million, respectively.

The following table shows the changes in OFG’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters and nine-month periods ended September 30, 2021 and 2020.

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands) (In thousands)
Balance at beginning of period $ 205 $ 894 $ 218 $ 985
Net (charge-offs/terminations) recoveries 86 (18) 73 (109)
Balance at end of period $ 291 $ 876 $ 291 $ 876

The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case OFG is obligated to repurchase the loan. 54

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

If a borrower defaults, 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 is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarters ended September 30, 2021 and 2020, OFG repurchased $517 thousand and $1 thousand, respectively, in mortgage loans subject to credit recourse. During the nine-month periods ended September 30, 2021 and 2020, Oriental repurchased $2.4 million and $481 thousand, respectively, in mortgage loans subject to credit recourse. If a borrower defaults, OFG has rights to the underlying collateral securing the mortgage loan. OFG suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At September 30, 2021, OFG’s liability for estimated credit losses related to loans sold with credit recourse amounted to $291 thousand (December 31, 2020– $218 thousand).

When OFG sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. OFG's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by OFG to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, OFG may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarter ended September 30, 2021, OFG repurchased $8.8 million (September 30, 2020 – $9.6 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. During the nine-month period ended September 30, 2021, Oriental repurchased $31.4 million (September 30, 2020 – $18.2 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. At September 30, 2021 and December 31, 2020, OFG had $4.0 million and $2.6 million, respectively, liability for the estimated credit losses related to these loans.

During the quarters ended September 30, 2021 and 2020, OFG recognized $85 thousand and $57 thousand in losses, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $728 thousand in losses and $892 thousand in gain, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the nine-month periods ended September 30, 2021 and 2020, Oriental recognized $153 thousand and $1 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $3.5 million and $1.2 million, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require OFG to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At September 30, 2021, OFG serviced $5.6 billion (December 31, 2020 - $5.4 billion) in mortgage loans for third parties. OFG generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, OFG must absorb the cost of the funds it advances during the time the advance is outstanding. OFG must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and OFG would not receive any future servicing income with respect to that loan. At September 30, 2021, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $16.8 million (December 31, 2020 - $20.7 million). To the extent the mortgage loans underlying OFG's servicing portfolio experience increased delinquencies, OFG would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 20— COMMITMENTS AND CONTINGENCIES

Loan Commitments

In the normal course of business, OFG becomes a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those instruments reflects the extent of OFG’s involvement in particular types of financial instruments. 55

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. OFG uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Credit-related financial instruments at September 30, 2021 and December 31, 2020 were as follows:

September 30, December 31,
2021 2020
(In thousands)
Commitments to extend credit $ 1,297,736 $ 1,133,503
Commercial letters of credit 1,700 225

Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by OFG upon the extension of credit, is based on management’s credit evaluation of the counterparty.

At September 30, 2021 and December 31, 2020, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements.

Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at September 30, 2021 and December 31, 2020, is as follows:

September 30, December 31,
2021 2020
(In thousands)
Standby letters of credit and financial guarantees $ 33,853 $ 19,476
Loans sold with recourse 124,860 135,252

Standby letters of credit and financial guarantees are written conditional commitments issued by OFG to guarantee the payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of credit in the event of non-performance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The amount of collateral obtained, if it is deemed necessary by OFG upon extension of credit, is based on management’s credit evaluation of the customer.

On January 1, 2020, OFG adopted CECL, which requires the measurement of the allowance for credit losses to be based on management’s best estimate of expected credit losses inherent in all financial assets measured at amortized cost and off-balance-sheet credit exposures. At September 30, 2021 and December 31, 2020, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit and stand by letters of credit amounted to $1.2 million and $1.1 million, respectively, and is included in other liabilities in the statement of financial condition. 56

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At September 30, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $10.1 million and $9.0 million, respectively, primarily for the acquisition of other investments.

Contingencies

OFG and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, OFG and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of OFG, including the Bank (and its subsidiary, OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and other regulators.

OFG seeks to resolve all arbitration, litigation and regulatory matters in the manner management believes is in the best interests of OFG and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.

In accordance with applicable accounting guidance, OFG establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, OFG, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, OFG will establish an accrued liability and record a corresponding amount of expense. At September 30, 2021 and December 31, 2020, this accrued liability amounted to $5.6 million and $8.1 million, respectively. OFG continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of OFG’s management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not be likely to have a material adverse effect on the consolidated statements of financial condition of OFG. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on OFG’s consolidated results of operations or cash flows in particular quarterly or annual periods. OFG has evaluated all arbitration, litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. OFG has determined that the estimate of the reasonably possible loss is not significant.

NOTE 21— OPERATING LEASES

Substantially all leases in which OFG is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2038. OFG’s leases do not contain residual value guarantees or variable lease payments. All leases are classified as operating leases and are included on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. OFG leases to others certain space in its principal offices for terms extending through 2022; and all are operating leases.

Operating Lease Cost 57

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020 Statement of Operations Classification
(In thousands)
Lease costs $ 2,590 $ 3,260 $ 8,814 $ 10,148 Occupancy and equipment
Variable lease costs 348 459 1,336 1,630 Occupancy and equipment
Short-term lease cost 414 358 560 386 Occupancy and equipment
Lease income (110) (125) (342) (374) Occupancy and equipment
Total lease cost $ 3,242 $ 3,952 $ 10,368 $ 11,790 58

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Operating Lease Assets and Liabilities

September 30, December 31
2021 2020 Statement of Financial Condition Classification
(In thousands)
Right-of-use assets $ 30,625 $ 31,383 Operating lease right-of-use assets
Lease Liabilities $ 32,167 $ 32,566 Operating leases liabilities
September 30, 2021
--- --- ---
(In thousands)
Weighted-average remaining lease term 5.7 years
Weighted-average discount rate 6.6%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2021 were as follows:

Minimum Rent
As of September 30, 2021 (In thousands)
2021 $ 10,253
2022 9,299
2023 8,197
2024 6,100
2025 4,417
Thereafter 10,264
Total lease payments $ 48,530
Less imputed interest 16,363
Present value of lease liabilities $ 32,167

OFG, as lessor, leases and subleases real property to lessee tenants under operating leases. As of September 30, 2021, no material lease concessions have been granted to lessees. OFG, as lessee, also leases real estate property for branch locations, ATM locations, and office space. As of September 30, 2021, OFG has not requested any lease concessions.

During the year ended December 31, 2020, OFG decided to consolidate several branches as a result of the Scotiabank Acquisition and modified certain lease contracts. These contracts were evaluated under Topic 842 lease modification guidance and removed from books, as they were considered short-term at December 31, 2020. 59

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

OFG follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”).

Fair Value Measurement

The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Money market investments

The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

Investment securities

The fair value of investment securities is based on valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. OFG holds one security categorized as other debt that is classified as Level 3. The estimated fair value of the other debt security is determined by using an adjusted third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates and current spread. The assumptions used are drawn from similar securities that are actively traded in the market and have similar risk characteristics. The valuation is performed on a quarterly basis.

Derivative instruments

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or OFG. Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3.

Servicing assets

Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3.

Foreclosed real estate

Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Other repossessed assets

Other repossessed assets include repossessed automobiles. The fair value of the repossessed automobiles may be determined using internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals. 60

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:

September 30, 2021
Fair Value Measurements
Level 1 Level 2 Level 3 Total
(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale $ 10,875 $ 496,725 $ 1,507 $ 509,107
Trading securities - 22 - 22
Money market investments 9,837 - - 9,837
Servicing assets - - 48,227 48,227
Derivative liabilities - (1,136) - (1,136)
$ 20,712 $ 495,611 $ 49,734 $ 566,057
Non-recurring fair value measurements:
Collateral dependent loans - - 10,439 10,439
Foreclosed real estate - - 13,904 13,904
Other repossessed assets - - 1,528 1,528
$ - $ - $ 25,871 $ 25,871
December 31, 2020
--- --- --- --- --- --- --- --- ---
Fair Value Measurements
Level 1 Level 2 Level 3 Total
(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale $ 10,983 $ 435,455 $ - $ 446,438
Trading securities - 22 - 22
Money market investments 11,908 - - 11,908
Servicing assets - - 47,295 47,295
Derivative liabilities - (1,712) - (1,712)
$ 22,891 $ 433,765 $ 47,295 $ 503,951
Non-recurring fair value measurements:
Collateral dependent loans $ - $ - $ 29,279 $ 29,279
Foreclosed real estate - - 11,596 11,596
Other repossessed assets - - 1,816 1,816
$ - $ - $ 42,691 $ 42,691

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value information included in the tables above for non-recurring fair value measurements is not as of period end, but as of the date that the fair value measurement was recorded during the quarters and nine-months ended September 30, 2021 and 2020 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30,
2021 2020
Other debt securities available for sale Servicing Assets Total Servicing Assets
(In thousands)
Balance at beginning of period $ - $ 47,712 47,712 $ 47,926
New instruments acquired - 1,339 1,339 656
Transfers from Level 2 1,500 - 1,500 -
Principal repayments and amortization - (1,740) (1,740) (1,365)
Gains included in earnings - 916 916 25
Gains included in other comprehensive income 7 - 7 -
Balance at end of period $ 1,507 $ 48,227 $ 49,734 $ 47,242
Nine-Month Period Ended September 30,
2021 2020
Other debt securities available for sale Servicing Assets Total Servicing Assets
(In thousands)
Balance at beginning of period $ - $ 47,295 47,295 $ 50,779
New instruments acquired - 4,782 4,782 1,236
Transfers from Level 2 1,500 - 1,500 -
Principal repayments and amortization - (5,109) (5,109) (2,810)
Gains (losses) included in earnings - 1,259 1,259 (1,963)
Gains included in other comprehensive income 7 - 7 -
Balance at end of period $ 1,507 48,227 $ 49,734 $ 47,242

The transfer of other debt securities available for sale amounting to $1.5 million during the quarter and nine-month period ended September 30, 2021 from level 2 to level 3 corresponded to a convertible note purchased on June 25, 2021. The fair value used at June 30, 2021 was its initial value due to the proximity of its acquisition date, where the transaction price equaled the fair value at acquisition. During the quarter ended September 30, 2021, it was reclassified as level 3 due to the significant unobservable inputs used to determine its fair value at September 30, 2021. There were no transfers into or out of level 3 during the quarter and nine-month period ended September 30, 2020.

Servicing assets gains (losses) included in earnings during the quarters and nine-month periods ended September 30, 2021 and 2020 were included as mortgage servicing activities in the consolidated statement of operations. There were no changes in unrealized gains and losses from recurring level 3 fair value measurements held at September 30, 2020 during the quarter and nine-month period then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 7 – Servicing Assets. 62

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the quarters and nine-month periods ended September 30, 2021 and 2020, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at September 30, 2021:

September 30, 2021
Fair Value Valuation Technique Unobservable Input Range Weighted Average
(In thousands)
Other debt securities available-for-sale $ 1,507 Cash flow valuation Credit Rating Baa1 - Baa3 Baa2
Probability of Default Rate 0.16% - 2.28% 0.35%
Recovery Rate 33.08% 33.08%
Servicing assets $ 48,227 Cash flow valuation Constant prepayment rate 4.37% - 21.09% 6.25%
Discount rate 10.00% - 15.50% 11.47%
Collateral dependent loans $ 10,439 Fair value of property<br><br>or collateral Appraised value less disposition costs 14.20% - 29.20% 20.20%
Foreclosed real estate $ 13,904 Fair value of property<br><br>or collateral Appraised value less disposition costs 14.20% - 29.20% 16.06%
Other repossessed assets $ 1,528 Fair value of property<br><br>or collateral Estimated net realizable value less disposition costs 46.00% - 68.00% 57.66%

63

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information about Sensitivity to Changes in Significant Unobservable Inputs

Other debt security available for sale – The significant unobservable inputs used in the fair value measurement of one of OFG’s other debt securities is a discounted cash flow methodology (DCF). DCF is a valuation method that uses the concept of the time value of money. The methodology used the future cash flows discounted through a yield to obtain a net present value. Assumptions applied in the model are obtained from Moody’s Default Trends.

Servicing assets – The significant unobservable inputs used in the fair value measurement of OFG’s servicing assets are constant prepayment rates and discount rates. 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.

Fair Value of Financial Instruments

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of OFG.

The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail deposits, and premises and equipment. 64

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The estimated fair value and carrying value of OFG’s financial instruments at September 30, 2021 and December 31, 2020 is as follows:

September 30, December 31,
2021 2020
Fair Carrying Fair Carrying
Value Value Value Value
(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents $ 2,755,512 $ 2,755,512 $ 2,154,202 $ 2,154,202
Restricted cash $ 179 $ 179 $ 1,375 $ 1,375
Investment securities available-for-sale $ 10,875 $ 10,875 $ 10,983 $ 10,983
Level 2
Financial Assets:
Trading securities $ 22 $ 22 $ 22 $ 22
Investment securities available-for-sale $ 496,725 $ 496,725 $ 435,455 $ 435,455
Investment securities held-to-maturity $ 371,827 $ 375,214 $ - $ -
Federal Home Loan Bank (FHLB) stock $ 7,496 $ 7,496 $ 8,278 $ 8,278
Other investments $ 10,434 $ 10,434 $ 3,962 $ 3,962
Financial Liabilities:
Derivative liabilities $ 1,136 $ 1,136 $ 1,712 $ 1,712
Level 3
Financial Assets:
Investment securities available-for-sale $ 1,507 $ 1,507 $ - $ -
Total loans (including loans held-for-sale) $ 6,086,493 $ 6,282,485 $ 6,323,689 $ 6,501,259
Accrued interest receivable $ 56,815 $ 56,815 $ 65,547 $ 65,547
Servicing assets $ 48,227 $ 48,227 $ 47,295 $ 47,295
Accounts receivable and other assets $ 84,581 $ 84,581 $ 78,845 $ 78,845
Financial Liabilities:
Deposits $ 9,277,633 $ 9,244,389 $ 8,422,599 $ 8,415,640
Advances from FHLB $ 64,049 $ 62,559 $ 68,147 $ 65,561
Other borrowings $ 375 $ 375 $ 707 $ 707
Subordinated capital notes $ 36,405 $ 36,083 $ 33,325 $ 36,083
Accrued expenses and other liabilities $ 120,555 $ 120,555 $ 154,418 $ 154,418

65

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at September 30, 2021 and December 31, 2020:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

• Investments in FHLB-NY stock are valued at their redemption value.

• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. The estimated fair value of the convertible note is determined by using an adjusted third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, default, and loss rates. The assumptions used are drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The valuation, which is obtained at least on a quarterly basis, is analyzed and its assumptions are evaluated and incorporated in either an internal-based valuation model, when deemed necessary, or compared to counterparties’ prices and agreed by management.

• The fair value of servicing asset 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.

• The fair values of the derivative instruments, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows are based on the forward yield curve and discounted using current estimated market rates.

• The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price, which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates. The fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan.

• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put dates. 66

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 23 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands) (In thousands)
Banking service revenues:
Checking accounts fees $ 2,281 $ 1,940 $ 6,329 $ 6,572
Savings accounts fees 297 354 846 1,192
Electronic banking fees 13,940 12,760 41,463 34,582
Credit life commissions 182 59 369 201
Branch service commissions 301 232 937 959
Servicing and other loan fees 988 742 2,460 1,551
International fees 215 157 520 454
Miscellaneous income (6) 53 15 167
Total banking service revenues 18,198 16,297 52,939 45,678
Wealth management revenue:
Insurance income 2,542 2,486 7,768 7,308
Broker fees 1,981 1,746 6,433 5,128
Trust fees 2,887 2,788 8,386 7,818
Retirement plan and administration fees 209 252 683 670
Total wealth management revenue 7,619 7,272 23,270 20,924
Mortgage banking activities:
Net servicing fees 4,388 3,139 11,865 8,506
Net gains on sale of mortgage loans and valuation 2,622 1,613 8,045 2,679
Other (815) (835) (3,607) (962)
Total mortgage banking activities 6,195 3,917 16,303 10,223
Total banking and financial service revenues $ 32,012 $ 27,486 $ 92,512 $ 76,825

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG recognizes the revenue from banking services, wealth management and mortgage banking based on the nature and timing of revenue streams from contracts with customer:

Banking Service Revenues

Electronic banking fees are credit and debit card processing services, use of the Bank’s ATMs by non-customers, debit card interchange income and service charges on deposit accounts. Revenue is recorded once the contracted service has been provided.

Service charges on checking and saving accounts as consumer periodic maintenance revenue is recognized once the service is rendered, while overdraft and late charges revenue are recorded after the contracted service has been provided.

Other income as credit life commissions, servicing and other loan fees, international fees, and miscellaneous fees recognized as banking services revenue are out of the scope of ASC 606 – Revenue from Contracts with Customers.

Wealth Management Revenue

Insurance income from commissions and sale of annuities are recorded once the sale has been completed.

Brokers fees consist of two categories:

 Sales commissions generated by advisors for their clients’ purchases and sales of securities and other investment products, which are collected once the stand-alone transactions are completed at trade date or as earned, and managed account fees which are fees charged to advisors’ clients’ accounts on the Company corporate advisory platform. These revenues do not cover future services, as a result there is no need to allocate the amount received to any other service.

 Fees for providing distribution services related to mutual funds, net of compensation paid to a service provider who provides such services, as well as trailer fees (also known as 12b-1 fees). These fees are considered variable and are recognized over time, as the uncertainty of the fees to be received is resolved as the net asset value of the mutual fund is determined and investor activity occurs. Fees do not cover future services, as a result there is no need to allocate the amount received to any other service.

Retirement plan and administration fees are revenues related to the payment received from the clients of OPC for assistance with the planning, design and administration of retirement plans, acting as third-party administrator for such plans, and daily record keeping services of retirement plans. Fees are collected once the stand-alone transaction was completed at trade date. Fees do not cover future services, as a result there is no need to allocate the amount received to any other service.

Trust fees are revenues related to investment advisory services provided to a registered investment company and fiduciary services provided to 401K retirement plans, an IRA trust, and retirement plans, which include investment management, payment of distributions, if any, safekeeping, custodial services of plan assets, servicing of Trust officers, on-going due diligence of the Trust, and recordkeeping of transactions. Fees are billed based on services contracted. Negotiated fees are detailed in the contract. Fees collected in advance, are amortized over the term of the contract. Fees are collected on a monthly basis once the administrative service has been completed. Monthly fee does not include future services.

Investment banking fees as compensation fees are out of the scope of ASC 606.

Mortgage Banking Activities

Mortgage banking activities as servicing fees, gain on sale of mortgage loans valuation and other are out of the scope of ASC 606. 68

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 24 – BUSINESS SEGMENTS

OFG segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These factors are reviewed on a periodical basis and may change if the conditions warrant.

Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for OFG’s own portfolio. As part of its mortgage banking activities, OFG may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, OPC and OFG Reinsurance. The core operations of this segment are financial planning, money management and investment banking, brokerage services, investment advisory services, insurance, corporate and individual trust and retirement services, as well as retirement plan administration services.

The Treasury segment encompasses all of OFG’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. 69

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 2021 and 2020:

Quarter Ended September 30, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 108,479 $ 7 $ 3,653 $ 112,139 $ - $ 112,139
Interest expense (8,946) - (488) (9,434) - (9,434)
Net interest income 99,533 7 3,165 102,705 - 102,705
Recapture of credit losses, net 4,815 - 182 4,997 - 4,997
Non-interest income 24,348 8,079 90 32,517 - 32,517
Non-interest expenses (72,463) (5,245) (1,216) (78,924) - (78,924)
Intersegment revenue 616 - - 616 (616) -
Intersegment expenses - (318) (298) (616) 616 -
Income before income taxes $ 56,849 $ 2,523 $ 1,923 $ 61,295 $ - $ 61,295
Income tax expense 19,614 - 10 19,624 - 19,624
Net income $ 37,235 $ 2,523 $ 1,913 $ 41,671 $ - $ 41,671
Total assets $ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865
Nine-Month Period Ended September 30, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 327,167 $ 25 $ 9,392 $ 336,584 $ - $ 336,584
Interest expense (31,794) - (1,624) (33,418) - (33,418)
Net interest income 295,373 25 7,768 303,166 - 303,166
Recapture of credit losses, net 5,964 - 1,014 6,978 - 6,978
Non-interest income 71,424 23,584 107 95,115 - 95,115
Non-interest expenses (222,960) (13,089) (3,217) (239,266) - (239,266)
Intersegment revenue 1,714 - - 1,714 (1,714) -
Intersegment expenses - (911) (803) (1,714) 1,714 -
Income before income taxes $ 151,515 $ 9,609 $ 4,869 $ 165,993 $ - $ 165,993
Income tax expense 53,089 - 33 53,122 - 53,122
Net income $ 98,426 $ 9,609 $ 4,836 $ 112,871 $ - $ 112,871
Total assets $ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865

70

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Quarter Ended September 30, 2020
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 112,832 $ 14 $ 2,091 $ 114,937 $ - $ 114,937
Interest expense (14,092) - (1,312) (15,404) - (15,404)
Net interest income 98,740 14 779 99,533 - 99,533
Provision (recapture) for credit losses, net (14,461) - 792 (13,669) - (13,669)
Non-interest income 23,994 7,323 9 31,326 - 31,326
Non-interest expenses (76,988) (5,138) (1,318) (83,444) - (83,444)
Intersegment revenue 769 - - 769 (769) -
Intersegment expenses - (225) (544) (769) 769 -
Income before income taxes $ 32,054 $ 1,974 $ (282) $ 33,746 $ - $ 33,746
Income tax expense (benefit) 6,308 (13) 13 6,308 - 6,308
Net income $ 25,746 $ 1,987 $ (295) $ 27,438 $ - $ 27,438
Total assets $ 9,367,141 $ 33,006 $ 1,725,221 $ 11,125,368 $ (1,106,377) $ 10,018,991
Nine-Month Period Ended September 30, 2020
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 351,933 $ 46 $ 8,347 $ 360,326 $ - $ 360,326
Interest expense (44,307) - (6,325) (50,632) - (50,632)
Net interest income 307,626 46 2,022 309,694 - 309,694
Provision for credit losses, net (77,795) - (701) (78,496) - (78,496)
Non-interest income 64,349 21,089 4,490 89,928 - 89,928
Non-interest expenses (237,943) (14,819) (3,485) (256,247) - (256,247)
Intersegment revenue 1,920 - - 1,920 (1,920) -
Intersegment expenses - (580) (1,340) (1,920) 1,920 -
Income before income taxes $ 58,157 $ 5,736 $ 986 $ 64,879 $ - $ 64,879
Income tax expense 9,305 4,506 42 13,853 - 13,853
Net income $ 48,852 $ 1,230 $ 944 $ 51,026 $ - $ 51,026
Total assets $ 9,367,141 $ 33,006 $ 1,725,221 $ 11,125,368 $ (1,106,377) $ 10,018,991

71

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion of OFG’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and OFG’s consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements,” “Risk Factors,” and "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 and set forth in our Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

Other factors not identified above, including those described under the headings in our Annual Report on Form 10-K for the year ended December 31 may also cause actual results to differ materially from those described in our forward-looking statements.

OFG is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer, auto and mortgage lending; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. OFG operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. OFG has 50 branches in Puerto Rico, 2 branches in the USVI, a subsidiary in Boca Raton, Florida, and a non-bank operating subsidiary in Cornelius, North Carolina. OFG’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and financial services, and improving operating efficiencies.

OFG’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, OFG’s commitment is to continue producing a balanced and growing revenue stream.

RECENT DEVELOPMENTS

Capital Actions

In July 2021, OFG announced the approval by the Board of Directors of a new stock repurchase program to purchase $50 million of its common stock in the open market. At September 30, 2021, OFG has repurchased approximately 1.7 million shares of its common stock for a total purchase price of $40.2 million at an average of $23.83 per share.

Also, on July 2021, OFG announced that its Board of Directors approved a 50% increase in its common stock dividend payable to shareholders of record on September 30, 2021, to $0.12 per share.

During the nine-months period ended September 30, 2021, OFG completed the redemption of $92.0 million of Series A, B and D preferred stock which represented all of OFG’s outstanding preferred stock.

Covid-19 Pandemic

In the first quarter of 2020, the World Health Organization declared the outbreak of Covid-19 a pandemic. OFG has been and may continue to be impacted by the Covid-19 pandemic. Puerto Rico’s economy is improving as more people get vaccinated and restrictive measures have eased. However, uncertainty remains about the duration of the pandemic and the timing and strength of Puerto Rico’s economic recovery. In response to the pandemic, the federal government enacted several economic relief packages providing trillions of dollars in relief to businesses and individuals and have also decreased interest rates to further stimulate the economy. In addition to these government relief initiatives, OFG and other banks in Puerto Rico granted various forms of assistance to customers and clients impacted by the Covid-19 pandemic, including payment deferrals and extending forgivable loans to businesses for payroll and certain other expenses under the Paycheck Protection Program of the Small Business Administration. These relief measures have led to a surge in liquidity in Puerto Rico that have substantially increased OFG’s deposits ($9.2 billion as of September 30, 2021) and cash balances ($2.8 billion as of September 30, 2021). This increase in deposits caused OFG to exceed $10 billion in assets for the first 72

time during the first quarter of 2021, and OFG has commenced preparing for the increased regulatory oversight and other requirements that will apply as a result of crossing such size threshold.

With respect to our loan portfolios, the increased liquidity has significantly reduced delinquent and non-performing loans by $94.0 million and $20.4 million, respectively, compared to December 31, 2020. Moreover, such liquidity coupled with the decrease in interest rates has led to increases in new home purchases, real estate values, and refinancing of owned residential mortgage loans with lower-rate residential mortgage loans sold to agency investors. These refinancing together with the decrease in PPP loans as they are forgiven have been partially offset by increases in the production of commercial and auto loans as the economy reopened and started to show signs of growth.

The macroeconomic outlook for Puerto Rico has improved from reduced Covid-19 related restrictions on economic activity, combined with the additional federal stimulus funds Puerto Rico is expected to receive related to the recovery from hurricane Maria in 2017, the early 2020 earthquakes, and now the Covid-19 pandemic.

For our people, we have decided on a mandatory Covid vaccination policy to keep our customers and people safe. We have also implemented a hybrid work model to increase flexibility for our people and have increased the hourly base pay rate for non-salaried staff.

Given OFG’s cash position and capital levels, OFG will seek opportunities to continue growing our loan portfolios organically and will continue to evaluate returning capital to shareholders through is stock repurchase program and quarterly common stock dividend.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2020 Form 10-K.

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our 2020 Form 10-K, we identified several accounting policies as critical, including the following, because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

 Allowance for Loan and Lease Losses

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2020 Form 10-K. 73

FINANCIAL HIGHLIGHTS

OFG generated outstanding results during the quarter ended September 30, 2021. This reflects the consistent growing recurring net income, our larger scale, our focus on increasing digital utilization and customer service differentiation, and Puerto Rico’s nascent economic and post-pandemic recovery.

OFG saw the effects of all this across all our businesses. New loan origination remained strong at $556.0 million. Asset quality trends continued to improve as reconstruction and stimulus funds provided significant liquidity to businesses and individuals. As a result of this, the provision for credit losses was a net benefit of $5.0 million.

Results were enhanced by a 17.0% reduction in cost of funds compared to the quarter ended June 30, 2021 and the previously announced deployment of excess capital to redeem all three of our outstanding series of preferred stock, eliminating $1.6 million in quarterly dividends.

Return on average assets and on average tangible equity expanded to 1.59% and 17.72%, respectively, compared to the previous and year ago quarters.

During the quarter ended September 30, 2021, OFG successfully executed on the buyback program, acquiring $40.2 million of shares as part of our previously announced $50.0 million authorization.

OFG is strategically well-positioned to continue to benefit from and play a major role supporting the economic development of the communities we serve.

Third quarter of 2021:

Earnings: Earnings per share diluted was $0.81 compared to $0.78 in the second quarter of 2021 and $0.50 in the third quarter of 2020. Total core revenues were $134.7 million compared to $133.3 million in the second quarter of 2021 and $127.0 million in the third quarter of 2020. Net interest margin was 4.12% compared to 4.22% in the second quarter of 2021 and 4.30% in the third quarter of 2020.

Interest Income: Total interest income of $112.1 million compared to $113.5 million in second quarter and $114.9 million in the third quarter of 2020. Third quarter reflected mortgage paydowns and PPP loan forgiveness mostly offset by increased income from auto and commercial loans, and investment securities. Average loan balances were $6.47 billion compared to $6.60 billion in second quarter and $6.79 billion in third quarter of 2020.

Loan Origination: Loan origination totaled $556.2 million compared to $673.6 million in second quarter and $457.8 million in third quarter of 2020. Third quarter reflected continued high levels of auto, commercial, consumer, and mortgage lending.

Deposit Balances and Cost of Funds: Interest Expense was $9.4 million compared to $11.2 million in second quarter and $15.4 million in third quarter of 2020. This quarter reflected lower cost of core deposits (30 bps compared to 38 bps in second quarter and 56 bps in third quarter of 2020) primarily due to generally lower rates and CD maturities. Average customer deposit balances were $9.10 billion compared to $8.96 billion in second quarter and $8.38 billion in third quarter of 2020.

Asset Quality and Provision for Credit Losses: The third quarter of 2021 reflected a net benefit of $5.0 million, reflecting $4.3 million in net reserve releases. This compares to a net benefit of $8.3 million in the second quarter and a net expense of $13.7 million in prior year quarter. This quarter reflected continued improvement in asset quality trends. Third quarters net charge-offs of $6 million included $6.5 million for a previously reserved amount on a commercial loan.

Banking and Financial Service Revenues: Total banking and financial service revenue totaled $32.0 million compared to $31.0 million in the second quarter and $27.5 million in prior year quarter. This quarter reflected continued higher levels of banking service, wealth management, and mortgage banking activity as pandemic-related restrictions have subsided.

Expenses: Non-interest expenses were $78.9 million compared to $82.7 million in the second quarter and $83.4 million in prior year quarter. This quarter reflects a $2.2 million benefit in credit related expenses from gains on sales of real estate owned, previously announced cost savings, and increased compensation. The second quarter included a $2.2 million technology project write down. 74

Pre-Provision Net Revenues: PPNR was $56.3 million, which includes the above non-cash write down, compared to $51.8 million in the second quarter of 2021 and $47.4 million in the third quarter of 2020.

Loans held for investment: Loans totaled $6.41 billion at third quarter compared to $6.50 billion at second quarter and $6.76 billion at prior year quarter. Excluding PPP loans, loans held for investment of $6.27 billion increased $5.0 million compared to second quarter.

Capital: Tangible book value per share was $18.59 compared to $18.13 in the second quarter and $16.51 in prior year quarter. CET1 ratio was 13.52% compared to 13.95% in the second quarter and 12.55% in prior year quarter.

Quarter Ended September 30, Nine-Month Period Ended September 30,
Variance Variance
2021 2020 % 2021 2020 %
EARNINGS DATA: (In thousands, except per share data) (In thousands, except per share data)
Interest income $ 112,139 $ 114,937 -2.4% $ 336,584 $ 360,326 -6.6%
Interest expense 9,434 15,404 -38.8% 33,418 50,632 -34.0%
Net interest income 102,705 99,533 3.2% 303,166 309,694 -2.1%
(Recapture) provision for credit losses, net (4,997) 13,669 -136.6% (6,978) 78,496 -108.9%
Net interest income after (recapture) provision for credit losses 107,702 85,864 25.4% 310,144 231,198 34.1%
Non-interest income 32,517 31,326 3.8% 95,115 89,928 5.8%
Non-interest expenses 78,924 83,444 -5.4% 239,266 256,247 -6.6%
Income before taxes 61,295 33,746 81.6% 165,993 64,879 155.9%
Income tax expense 19,624 6,308 211.1% 53,122 13,853 283.5%
Net income 41,671 27,438 51.9% 112,871 51,026 121.2%
Less: dividends on preferred stock - (1,628) 100.0% (1,255) (4,884) 74.3%
Income available to common shareholders $ 41,671 $ 25,810 61.5% $ 111,616 $ 46,142 141.9%
PER SHARE DATA:
Basic $ 0.82 $ 0.50 64.0% $ 2.18 $ 0.90 142.2%
Diluted $ 0.81 $ 0.50 62.0% $ 2.15 $ 0.89 141.6%
Average common shares outstanding 51,063 51,342 -0.5% 51,364 51,361 0.0%
Average common shares outstanding and equivalents 51,516 51,527 0.0% 51,748 51,563 0.4%
Cash dividends declared per common share $ 0.12 $ 0.07 75.2% $ 0.28 $ 0.21 33.0%
Cash dividends declared on common shares $ 6,240 $ 3,595 73.6% $ 14,637 $ 10,787 35.7%
PERFORMANCE RATIOS:
Return on average assets (ROA) 1.59% 1.11% 43.2% 1.46% 0.71% 105.6%
Return on average tangible common equity 17.72% 12.23% 44.9% 16.25% 7.44% 118.4%
Return on average common equity (ROE) 15.63% 10.53% 48.4% 14.25% 6.37% 123.7%
Efficiency ratio 58.59% 65.69% -10.8% 60.47% 66.30% -8.8%
Interest rate spread 4.09% 4.25% -3.8% 4.16% 4.60% -9.6%
Interest rate margin 4.12% 4.30% -4.0% 4.20% 4.65% -9.7%

75

September 30, December 31, Variance
2021 2020 %
PERIOD END BALANCES AND CAPITAL RATIOS: (In thousands, except per share data)
Cash, cash equivalents and restricted cash $ 2,755,691 $ 2,155,577 27.8%
Investments and loans
Investment securities $ 902,273 $ 458,700 96.7%
Loans and leases, net 6,282,485 6,501,259 -3.4%
Total investments and loans $ 7,184,758 $ 6,959,959 3.2%
Deposits and borrowings
Deposits $ 9,244,389 $ 8,415,640 9.8%
Other borrowings 99,017 102,351 -3.3%
Total deposits and borrowings $ 9,343,406 $ 8,517,991 9.7%
Stockholders’ equity
Preferred stock $ - $ 92,000 -100.0%
Common stock 59,885 59,885 0.0%
Additional paid-in capital 635,808 622,652 2.1%
Legal surplus 114,485 103,269 10.9%
Retained earnings 375,729 300,096 25.2%
Treasury stock, at cost (140,862) (102,949) -36.8%
Accumulated other comprehensive (loss) 8,620 11,022 -21.8%
Total stockholders' equity $ 1,053,665 $ 1,085,975 -3.0%
Per share data
Book value per common share $ 21.08 $ 19.54 7.9%
Tangible book value per common share $ 18.59 $ 16.97 9.5%
Market price at end of period $ 25.22 $ 18.54 36.0%
Capital ratios
Leverage capital 9.33% 10.30% -9.4%
Common equity Tier 1 capital ratio 13.52% 13.08% 3.4%
Tier 1 risk-based capital 14.03% 14.78% -5.1%
Total risk-based capital 15.28% 16.04% -4.7%
Equity-to-assets ratio 9.93% 11.05% -10.1%
Financial assets managed
Trust assets managed $ 3,685,968 $ 3,476,491 6.0%
Broker-dealer assets $ 2,362,317 $ 2,474,234 -4.5%

76

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters and nine-month periods ended September 30, 2021 and 2020. Comparative September 30, 2020 to September 30, 2019 information has been omitted pursuant to Item 303(b) of Regulation S-K. For such comparative information, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Oriental’s September 30, 2020 quarterly report on Form 10-Q.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED SEPTEMBER 30, 2021 AND 2020
Interest Average rate Average balance
September September September September September September
2021 2020 2021 2020 2021 2020
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 112,139 $ 114,938 4.50% 4.96% $ 9,879,687 $ 9,218,717
Tax equivalent adjustment 2,438 2,427 0.10% 0.10% - -
Interest-earning assets - tax equivalent 114,577 117,365 4.60% 5.06% 9,879,687 9,218,717
Interest-bearing liabilities 9,434 15,404 0.41% 0.71% 9,213,530 8,619,955
Tax equivalent net interest income / spread 105,143 101,961 4.19% 4.35% 666,157 598,762
Tax equivalent interest rate margin 4.30% 4.45%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 3,216 2,278 1.80% 1.81% 714,669 502,671
Interest bearing cash and money market investments 986 613 0.14% 0.13% 2,699,144 1,929,024
Total investments 4,202 2,891 0.49% 0.47% 3,413,813 2,431,695
Non-PCD:
Mortgage 9,759 11,208 5.22% 5.51% 747,942 814,189
Commercial 29,558 27,667 5.55% 5.20% 2,111,935 2,117,502
Consumer 11,180 12,931 11.12% 11.31% 399,002 454,780
Auto 34,535 31,223 8.35% 8.37% 1,640,433 1,484,282
Total Non-PCD loans 85,032 83,029 6.89% 6.78% 4,899,312 4,870,753
PCD loans:
Mortgage 18,785 21,843 5.66% 5.75% 1,299,330 1,511,567
Commercial 3,609 6,390 5.76% 6.92% 248,708 367,475
Consumer 64 35 16.16% 4.87% 1,580 2,839
Auto 447 750 10.47% 8.68% 16,944 34,388
Total PCD loans 22,905 29,018 5.85% 6.06% 1,566,562 1,916,269
Total loans 107,937 112,047 6.62% 6.57% 6,465,874 6,787,022
Total interest-earning assets 112,139 114,938 4.50% 4.96% 9,879,687 9,218,717

77

Interest Average rate Average balance
September September September September September September
2021 2020 2021 2020 2021 2020
(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts 2,288 2,247 0.33% 0.40% 2,754,985 2,227,687
Savings and money market 1,639 2,010 0.28% 0.41% 2,330,121 1,927,680
Time deposits 2,916 7,512 0.84% 1.55% 1,378,505 1,944,856
Total core deposits 6,843 11,769 0.42% 0.78% 6,463,611 6,100,223
Brokered deposits 10 812 0.34% 2.30% 11,366 140,416
6,853 12,581 0.42% 0.81% 6,474,977 6,240,639
Non-interest bearing deposits - - 0.00% 0.00% 2,639,610 2,276,400
Fair value premium and core deposit intangible amortizations 1,838 2,039 - - - -
Total deposits 8,691 14,620 0.38% 0.68% 9,114,587 8,517,039
Borrowings:
Advances from FHLB and other borrowings 450 476 2.84% 2.83% 62,860 66,833
Subordinated capital notes 293 308 3.21% 3.39% 36,083 36,083
Total borrowings 743 784 2.98% 3.03% 98,943 102,916
Total interest bearing liabilities 9,434 15,404 0.41% 0.71% 9,213,530 8,619,955
Net interest income / spread $ 102,705 $ 99,534 4.09% 4.25%
Interest rate margin 4.12% 4.30%
Excess of average interest-earning assets over average interest-bearing liabilities $ 666,157 $ 598,762
Average interest-earning assets to average interest-bearing liabilities ratio 107.23% 106.95%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investments $ 1,168 $ 143 $ 1,311
Loans (4,809) 699 (4,110)
Total interest income (3,641) 842 (2,799)
Interest Expense:
Deposits 1,026 (6,955) (5,929)
Other borrowings (30) (11) (41)
Total interest expense 996 (6,966) (5,970)
Net Interest Income $ (4,637) $ 7,808 $ 3,171

78

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020
Interest Average rate Average balance
September September September September September September
2021 2020 2021 2020 2021 2020
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 336,584 $ 360,326 4.66% 5.41% $ 9,656,838 $ 8,874,886
Tax equivalent adjustment 6,803 7,869 0.09% 0.12% - -
Interest-earning assets - tax equivalent 343,387 368,195 4.75% 5.53% 9,656,838 8,874,886
Interest-bearing liabilities 33,418 50,632 0.50% 0.81% 8,999,822 8,297,837
Tax equivalent net interest income / spread 309,969 317,563 4.25% 4.72% 657,016 577,049
Tax equivalent interest rate margin 4.34% 4.84%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 8,088 9,552 1.75% 1.88% 614,599 679,201
Interest bearing cash and money market investments 2,287 3,760 0.12% 0.35% 2,476,139 1,423,781
Total investments 10,375 13,312 0.45% 0.85% 3,090,738 2,102,982
Non-PCD
Mortgage 30,557 33,196 5.25% 5.50% 776,225 804,702
Commercial 86,934 85,528 5.44% 5.64% 2,138,474 2,019,853
Consumer 34,006 42,064 11.28% 11.81% 403,037 474,455
Auto and leasing 101,652 93,555 8.53% 8.43% 1,592,482 1,481,956
Total Non-PCD loans 253,149 254,343 6.89% 7.09% 4,910,218 4,780,966
PCD
Mortgage 59,548 72,570 5.80% 6.19% 1,369,410 1,564,153
Commercial 11,716 17,172 5.93% 5.98% 264,238 383,525
Consumer 176 323 14.39% 12.54% 1,635 3,434
Auto 1,620 2,606 10.51% 8.74% 20,599 39,826
Total PCD loans 73,060 92,671 5.88% 6.21% 1,655,882 1,990,938
Total loans 326,209 347,014 6.64% 6.83% 6,566,100 6,771,904
Total interest-earning assets 336,584 360,326 4.66% 5.41% 9,656,838 8,874,886

79

Interest Average rate Average balance
September September September September September September
2021 2020 2021 2020 2021 2020
(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts 6,940 6,772 0.36% 0.43% 2,566,201 2,092,973
Savings and money market 5,859 6,426 0.36% 0.46% 2,191,316 1,845,253
Time deposits 12,664 23,480 1.07% 2.37% 1,576,460 1,991,432
Total core deposits 25,463 36,678 0.54% 0.85% 6,333,977 5,929,658
Brokered deposits 197 3,844 0.86% 2.51% 30,482 203,779
25,660 40,522 0.54% 0.88% 6,364,459 6,133,437
Non-interest bearing deposits - - 0.00% 0.00% 2,535,422 1,987,211
Fair value premium and core deposit intangible amortizations 5,515 6,163 - - - -
Total deposits 31,175 46,685 0.47% 0.77% 8,899,881 8,120,648
Borrowings:
Securities sold under agreements to repurchase - 1,335 0.00% 2.62% - 67,956
Advances from FHLB and other borrowings 1,361 1,521 2.85% 2.77% 63,858 73,150
Subordinated capital notes 882 1,091 3.26% 4.02% 36,083 36,083
Total borrowings 2,243 3,947 3.00% 2.97% 99,941 177,189
Total interest-bearing liabilities 33,418 50,632 0.50% 0.81% 8,999,822 8,297,837
Net interest income / spread $ 303,166 $ 309,694 4.16% 4.60%
Interest rate margin 4.20% 4.65%
Excess of average interest-earning assets over average interest-bearing liabilities $ 657,016 $ 577,049
Average interest-earning assets to average interest-bearing liabilities ratio 107.30% $ 106.95%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investments $ 6,253 $ (9,190) $ (2,937)
Loans (8,720) (12,085) (20,805)
Total interest income (2,467) (21,275) (23,742)
Interest Expense:
Deposits 4,480 (19,990) (15,510)
Repurchase agreements (1,335) - (1,335)
Other borrowings (222) (147) (369)
Total interest expense 2,923 (20,137) (17,214)
Net Interest Income $ (5,390) $ (1,138) $ (6,528)

Net Interest Income

Net interest income is a function of the difference between rates earned on OFG’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). OFG constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels. 80

Comparison of the quarters ended September 30, 2021 and 2020

Net interest income of $102.7 million increased $3.2 million from $99.5 million. Tax equivalent basis net interest income of $105.1 million increased $3.2 million, or 3.1%, from $101.9 million.

Interest rate spread decreased 16 basis points to 4.09% from 4.25% and net interest margin decreased 18 basis points to 4.12% from 4.30%. These decreases are mainly due to the net effect of a decrease of 46 basis points in the average yield of total interest-earning assets, driven by the increase in cash and investment securities, and a decrease of 30 basis points in the total average cost of interest-bearing liabilities. Net interest margin, on a taxable equivalent basis, is 4.30%, a decrease of 15 basis points compared to 4.45% for the same quarter of 2020.

Net interest income was adversely impacted by:

 Lower interest income from loans by $4.1 million, reflecting lower average balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $3.4 million from unamortized yield for $95.6 million of forgiven PPP loans.

Net interest income was positively impacted by:

 Lower interest expense from deposits by $5.9 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs.

Comparison of the nine-month periods ended September 30, 2021 and 2020

Net interest income of $303.2 million decreased $6.5 million from $309.7 million. Tax equivalent net interest income of $310.0 million decreased $7.6 million, or 2.4%, from $317.6 million.

Interest rate spread decreased 44 basis points to 4.16% from 4.60% and net interest margin decreased 45 basis points to 4.20% from 4.65%. These decreases are mainly due to the net effect of a decrease of 75 basis points in the average yield of total interest-earning assets, driven by the increase in cash and investment securities, and a decrease of 31 basis points in the total average cost of interest-bearing liabilities.

Net interest income was adversely impacted by:

 Lower interest income from loans by $20.8 million, reflecting lower average balances in the mortgage and commercial PCD portfolios, and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans, partially offset by interest income of $7.0 million from unamortized yield for $310.7 million of forgiven PPP loans;

 $6.5 million in one-time interest recoveries from acquired PCD loans recorded during prior year; and

 Lower interest income from interest bearing cash and investment securities by $2.9 million, mainly impacted by the Federal Reserve Bank’s rate cuts.

Net interest income was positively impacted by:

 Lower interest expense from deposits by $15.5 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs; and

 Lower interest expense in borrowings by $1.7 million, mainly as a result of a decrease in interest expense from securities sold under agreements to repurchase from $1.3 million in the prior year period to none in the current period. During the nine-month period ended September 30, 2020, all repurchase agreements matured or were early extinguished. 81

TABLE 2 - NON-INTEREST INCOME SUMMARY
Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 Variance 2021 2020 Variance
(In thousands)
Banking service revenue $ 18,198 $ 16,297 11.7% $ 52,939 $ 45,678 15.9%
Wealth management revenue 7,619 7,272 4.8% 23,270 20,924 11.2%
Mortgage banking activities 6,195 3,917 58.2% 16,303 10,223 59.5%
Total banking and financial service revenue 32,012 27,486 16.5% 92,512 76,825 20.4%
Net gain on:
Sale of securities available for sale - - 0.0% - 4,728 -100.0%
Bargain purchase from Scotiabank acquisition - 3,465 -100.0% - 7,336 -100.0%
Other non-interest income 505 375 34.7% 2,603 1,039 150.5%
Total non-interest income, net $ 32,517 $ 31,326 3.8% $ 95,115 $ 89,928 5.8%

Non-Interest Income

Non-interest income is affected by the amount of the Bank’s trust department assets under management, transactions generated by clients’ financial assets serviced by OFG’s securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities, fees generated from loans and deposit accounts, and gains on sales of assets.

Comparison of quarters ended September 30, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $32.5 million, compared to $31.3 million, an increase of 3.8%, or $1.2 million. The increase in non-interest income was mainly due to:

 An increase of $1.9 million in banking service revenues, mainly from higher fees on deposit accounts, credit and debit cards interchange fees and higher volume of transactions due to the impact of the COVID-19 on economic activity last year; and

 An increase of $2.3 million in mortgage-banking activities, as quarterly mortgage-servicing rights valuation and gains on loans sold increased by $1.2 million and $1.0 million, respectively.

The increase in non-interest income was offset by:

 A $3.5 million bargain purchase gain from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes, recorded during prior year quarter.

Comparison of nine-month periods ended September 30, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $95.1 million, compared to $89.9 million, an increase of 5.8%, or $5.2 million. The increase in non-interest income was mainly due to:

 An increase of $7.3 million in banking service revenues, mainly from higher fees on deposit accounts, credit and debit cards interchange fees and higher volume of transactions reflecting the impact of the COVID-19 on economic activity last year;

 An increase of $2.3 million in wealth management revenue due to higher broker-dealer sales, insurance income and trust fees of $1.3 million, $460 thousand, and $568 thousand, respectively; and 82

 An increase of $6.1 million in mortgage-banking activities, as net servicing fees and gains on loans sold increased by $3.4 million and $5.1 million, respectively. This increase was offset by higher losses of $2.4 million on repurchased loans as average volume increased during the period.

The increase in non-interest income was offset by:

 A $4.7 million gain recorded during 2020 on the sales of $316.0 million mortgage-backed securities; and

 A $7.3 million bargain purchase gain from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes, recorded during 2020.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 Variance % 2021 2020 Variance %
(In thousands)
Compensation and employee benefits $ 33,745 $ 31,955 5.6% $ 99,282 $ 102,005 -2.7%
Occupancy, equipment and infrastructure costs 12,078 11,943 1.1% 37,734 35,220 7.1%
Electronic banking charges 9,615 8,734 10.1% 27,163 26,284 3.3%
Information technology expenses 3,621 5,381 -32.7% 13,407 16,259 -17.5%
Professional and service fees 5,003 3,331 50.2% 14,938 12,596 18.6%
Taxes, other than payroll and income taxes 3,257 3,774 -13.7% 10,535 10,123 4.1%
Insurance 2,530 2,428 4.2% 7,659 8,667 -11.6%
Foreclosed real estate and other repossessed assets (income) expenses (2,163) 1,323 -263.5% (1,885) 6,763 -127.9%
Loan servicing and clearing expenses 1,908 2,345 -18.6% 5,690 4,836 17.7%
Advertising, business promotion, and strategic initiatives 1,646 1,481 11.1% 4,783 4,643 3.0%
Communication 1,327 1,117 18.8% 3,332 2,993 11.3%
Printing, postage, stationery and supplies 878 1,094 -19.7% 3,037 2,767 9.8%
Director and investor relations 243 302 -19.5% 867 928 -6.6%
Merger and restructuring charges - 2,681 -100.0% - 5,991 -100.0%
Pandemic expenses 1,223 2,090 -41.5% 4,523 4,291 5.4%
Other 4,013 3,465 15.8% 8,201 11,881 -31.0%
Total non-interest expenses $ 78,924 $ 83,444 -5.4% $ 239,266 $ 256,247 -6.6%
Relevant ratios and data:
Efficiency ratio 58.59% 65.69% 60.47% 66.30%
Compensation and benefits to non-interest expense 42.76% 38.30% 41.49% 39.81%
Compensation to average total assets owned (annualized) 1.29% 1.29% 1.29% 1.42%
Average number of employees 2,251 2,343 2,241 2,405
Average compensation per employee (annualized, in thousands) $ 60.0 $ 54.6 $ 59.1 $ 56.6
Average loans per average employee $ 2,872 $ 2,897 $ 2,931 $ 2,816

Non-Interest Expenses

Comparison of quarters ended September 30, 2021 and 2020

Non-interest expense was $78.9 million, representing a decrease of 5.4%, or $4.5 million, compared to $83.4 million. 83

Non-interest expenses were positively impacted by:

 Decrease in foreclosed real estate and other repossessed assets expenses by $3.5 million reflecting higher gains on sales and favorable valuation of $2.2 million and $800 thousand, respectively;

 Decrease in information technology expenses by $1.8 million reflecting systems integrations expenses related to Scotiabank Acquisition recorded in the prior year quarter; and

 Merger and restructuring charges amounting $2.7 million in 2020 related to the Scotiabank Acquisition.

Non-interest expenses were adversely impacted by:

 Increase in compensation and employee benefits by $1.8 million reflecting $1.2 million of higher stock-based compensation expense and increased compensation for hourly employees; and

 Increase in professional and service fees expenses by $1.7 million mainly due to higher consulting and advisory expenses and legal expenses by $832 thousand and $512 thousand, respectively.

The efficiency ratio improved to 58.59% from 65.69%. The efficiency ratio measures how much of OFG’s revenues is used to pay operating expenses. OFG computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the quarters ended September 30, 2021 and 2020 amounted to $505 thousand and $3.8 million, respectively.

Comparison of nine-month periods ended September 30, 2021 and 2020

Non-interest expense was $239.3 million, representing a decrease of 6.6%, or $17.0 million, compared to $256.2 million.

Non-interest expenses were positively impacted by:

 Lower compensation and employee benefits by $2.7 million, reflecting lower employee count and a $1.3 million Covid-19 employee tax credit;

 Decrease in information technology expenses by $2.9 million reflecting systems integrations expenses related to Scotiabank Acquisition recorded during prior year period;

 Improvements in foreclosed real estate and other repossessed assets (income) expenses by $8.6 million reflecting higher valuations and gains on sales on other real estate owned of $1.9 million and $2.9 million, respectively. Also, higher gains on repossessed auto of $1.6 million due to higher demand and volume compared to prior year period;

 Merger and restructuring charges amounting $6.0 million in 2020 related to the Scotiabank Acquisition in the prior year period; and

 Decrease in claims and settlements accruals by $3.6 million.

Non-interest expenses were adversely impacted by:

 Increase in professional and service fees expenses by $2.3 million mainly due to higher legal expenses by $1.8 million.

 Increase in occupancy, equipment, and infrastructure costs by $2.5 million reflecting higher information technology infrastructure expenses by $1.8 million. 84

The efficiency ratio improved to 60.47% from 66.30%. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the nine-months ended September 30, 2021 and 2020 amounted to $2.6 million and $13.1 million, respectively.

Provision for Credit Losses

Comparison of quarters ended September 30, 2021 and 2020

Based on an analysis of the credit quality and the composition of OFG’s loan portfolio, management determined that the provision for the quarter ended September 30, 2021 was adequate to maintain the allowance for credit losses at an appropriate level to provide for expected credit losses.

Provision for credit losses decreased $18.7 million from $13.7 million to a recapture of $5.0 million resulting from $4.3 million net reserve releases. Net charge-offs for the quarter amounting to $6.0 million included $6.5 million for a previously reserved amount on a commercial loan.

Comparison of nine-month periods ended September 30, 2021 and 2020

Based on an analysis of the credit quality and the composition of OFG’s loan portfolio, management determined that the provision for the nine-month period ended September 30, 2021 was adequate to maintain the allowance for credit losses at an appropriate level to provide for expected credit losses based upon an evaluation of known and inherent risks.

Provision for credit losses decreased $85.5 million from $78.5 million to a recapture of $7.0 million reflecting continued improvement in asset quality trends. Prior year provision 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.

Income Taxes

Comparison of quarters ended September 30, 2021 and 2020

OFG’s effective tax rate (ETR) was 32.0% in 2021 compared to 18.7% in 2020. The increase in ETR is associated with a higher proportion of exempt income and income taxed at preferential rates in the previous year quarter.

Comparison of nine-month periods ended September 30, 2021 and 2020

OFG’s effective tax rate (ETR) was 32.0% in 2021 compared to 21.4% in 2020. The increase in ETR is associated with a higher proportion of exempt income and income taxed at preferential rates in the previous year. 85

Business Segments

OFG segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG’s organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 2021 and 2020.

Quarter Ended September 30, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 108,479 $ 7 $ 3,653 $ 112,139 $ - $ 112,139
Interest expense (8,946) - (488) (9,434) - (9,434)
Net interest income 99,533 7 3,165 102,705 - 102,705
Recapture of credit losses 4,815 - 182 4,997 - 4,997
Non-interest income 24,348 8,079 90 32,517 - 32,517
Non-interest expenses (72,463) (5,245) (1,216) (78,924) - (78,924)
Intersegment revenue 616 - - 616 (616) -
Intersegment expenses - (318) (298) (616) 616 -
Income before income taxes $ 56,849 $ 2,523 1,923 $ 61,295 $ - $ 61,295
Income tax expense 19,614 - 10 19,624 - 19,624
Net income $ 37,235 $ 2,523 $ 1,913 $ 41,671 $ - $ 41,671
Total assets $ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865
Nine-Month Period Ended September 30, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 327,167 $ 25 $ 9,392 $ 336,584 $ - $ 336,584
Interest expense (31,794) - (1,624) (33,418) - (33,418)
Net interest income 295,373 25 7,768 303,166 - 303,166
Recapture of credit losses 5,964 - 1,014 6,978 - 6,978
Non-interest income 71,424 23,584 107 95,115 - 95,115
Non-interest expenses (222,960) (13,089) (3,217) (239,266) - (239,266)
Intersegment revenue 1,714 - - 1,714 (1,714) -
Intersegment expenses - (911) (803) (1,714) 1,714 -
Income before income taxes $ 151,515 $ 9,609 4,869 $ 165,993 $ - $ 165,993
Income tax expense 53,089 - 33 53,122 - 53,122
Net income $ 98,426 $ 9,609 $ 4,836 $ 112,871 $ - $ 112,871
Total assets $ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865

86

Quarter Ended September 30, 2020
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 112,832 $ 14 $ 2,091 $ 114,937 $ - $ 114,937
Interest expense (14,092) - (1,312) (15,404) - (15,404)
Net interest income 98,740 14 779 99,533 - 99,533
Provision for loan and lease losses (14,461) - 792 (13,669) - (13,669)
Non-interest income 23,994 7,323 9 31,326 - 31,326
Non-interest expenses (76,988) (5,138) (1,318) (83,444) - (83,444)
Intersegment revenue 769 - - 769 (769) -
Intersegment expenses - (225) (544) (769) 769 -
Income before income taxes $ 32,054 $ 1,974 $ (282) $ 33,746 $ - $ 33,746
Income tax expense 6,308 (13) 13 6,308 - 6,308
Net income $ 25,746 $ 1,987 $ (295) $ 27,438 $ - $ 27,438
Total assets $ 9,367,141 $ 33,006 $ 1,725,221 $ 11,125,368 $ (1,106,377) $ 10,018,991
Nine-Month Period Ended September 30, 2020
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 351,933 $ 46 $ 8,347 $ 360,326 $ - $ 360,326
Interest expense (44,307) - (6,325) (50,632) - (50,632)
Net interest income 307,626 46 2,022 309,694 - 309,694
Provision for loan and lease losses (77,795) - (701) (78,496) - (78,496)
Non-interest income 64,349 21,089 4,490 89,928 - 89,928
Non-interest expenses (237,943) (14,819) (3,485) (256,247) - (256,247)
Intersegment revenue 1,920 - - 1,920 (1,920) -
Intersegment expenses - (580) (1,340) (1,920) 1,920 -
Income before income taxes $ 58,157 $ 5,736 $ 986 $ 64,879 $ - $ 64,879
Income tax expense 9,305 4,506 42 13,853 - 13,853
Net income $ 48,852 $ 1,230 $ 944 $ 51,026 $ - $ 51,026
Total assets $ 9,367,141 $ 33,006 $ 1,725,221 $ 11,125,368 $ (1,106,377) $ 10,018,991

Comparison of quarters ended September 30, 2021 and 2020

Banking

OFG's banking segment net income before taxes increased $24.8 million from $32.1 million to income of $56.8 million, mainly reflecting:

 Decrease in provision for credit losses by $19.3 million, mainly due to current quarter $4.3 million provision release as a result of continued significant improvement in asset quality; 87

 Lower interest expense from deposits by $5.1 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs;

 An increase of $1.9 million in banking service revenues, mainly from higher fees on deposit accounts, credit and debit cards interchange fees and higher volume of transactions reflecting the impact of the COVID-19 on economic activity last year; and

 An increase of $2.3 million in mortgage-banking activities, as quarterly mortgage-servicing rights valuation and gains on loans sold increased by $1.2 million and $1.0 million, respectively.

The increases in the banking segment’s net income was partially offset by, lower interest income from loans by $4.4 million, reflecting lower average balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $3.4 million from unamortized yield for $95.6 million of forgiven PPP loans.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment increased $549 thousand, mainly from higher broker-dealer sales and trust fees of $265 thousand and $99 thousand, respectively.

Treasury

Treasury segment net income before taxes increased by $2.2 million, mainly reflecting:

 Increase in interest income by $1.6 million, reflecting the purchase of held to maturity securities during current quarter; and

 Decrease in provision for credit losses in US commercial loans by $610 thousand, mainly due to continued asset quality improvements.

Comparison of nine-month periods ended September 30, 2021 and 2020

Banking

OFG's banking segment net income before taxes increased $93.4 million from $58.2 million to $151.5 million, mainly reflecting:

 Decrease in provision for credit losses by $83.8 million, mainly due to updates in macro-economic outlook and continued asset quality improvement, as reflected in charge-off, non-performing, and delinquency rates. Prior year period 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;

 Lower interest expense from deposits by $12.5 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs;

 An increase of $7.3 million in banking service revenues, mainly from higher fees on deposit accounts, credit and debit cards interchange fees and higher volume of transactions reflecting the impact of the COVID-19 on economic activity last year;

 An increase of $6.1 million in mortgage-banking activities, as net servicing fees and gains on loans sold increased by $3.4 million and $5.1 million, respectively. This increase was offset by higher losses of $2.4 million on repurchased loans as average volume increased during the period; and

 Decrease in non-interest expenses by $15.0 million, mainly in compensation and employee benefits, information technology expenses, foreclosed real estate and other repossessed assets expenses, merger and restructuring, and insurance expenses. 88

The increases in the banking segment’s net income were partially offset by:

 Lower interest income from loans by $25.0 million, reflecting lower balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $7.0 million from unamortized yield for $310.7 million of forgiven PPP loans.

 A $7.3 million bargain purchase gain from the Scotiabank Acquisition recorded in prior year.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment increased $3.9 million, mainly from higher broker-dealer sales, insurance income and trust fees of $1.3 million, $460 thousand, and $568 thousand, respectively.

Treasury

Treasury segment net income before taxes increased by $3.9 million, mainly reflecting:

 Lower interest expenses in borrowings by $4.7 million, from the maturity and early extinguishment of repurchase agreements during 2020; and

 Decrease in provision for credit losses in US commercial loans by $1.7 million, mainly due asset quality improvements during the current period.

Such increases were partially offset by a gain of $4.7 million on the sales of securities recorded in prior period.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At September 30, 2021, OFG’s total assets amounted to $10.607 billion representing an increase of 7.9%, when compared to $9.826 billion at December 31, 2020. Cash and due from banks and investments portfolios increased by $602.2 million and $443.6 million, respectively, while loans decreased by $218.8 million.

Cash and cash equivalents of $2.756 billion increased by $600.1 million primarily because of the influx of both commercial and retail deposits from increased liquidity in the economy because of government stimulus programs.

OFG’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other commercial and industrial loans, consumer loans, and auto loans. At September 30, 2021, OFG’s loan portfolio decreased by 3.4% mainly due to loan portfolios run-off. PCD loan portfolio, excluding allowance for credits losses, decreased $244.8 million to $1.527 billion at September 30, 2021. This decrease was offset by loan production in the nine-month period of 2021 of $1.758 billion, compared to $1.245 billion in the year ago period, driven by auto and commercial lending, including $159.0 million PPP loan originations.

Financial Assets Managed

OFG’s financial assets include those managed by OFG’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer and insurance subsidiaries. OFG’s trust division offers various types of individual retirement accounts (“IRAs”) and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary manages private retirement plans. At September 30, 2021, the total assets managed by OFG’s trust division and retirement plan administration subsidiary amounted to $3.667 billion, compared to $3.476 billion at December 31, 2020. OFG’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At September 30, 2021, total assets gathered by the broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.362 billion, compared to $2.474 billion at December 31, 2020. 89

Goodwill

OFG’s goodwill is not amortized to expense but is tested at least annually for impairment. 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 completes its annual goodwill impairment test as of October 31 of each year. OFG tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary.

As of September 30, 2021, 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. Please refer to Note 9 Goodwill and Other Intangible Assets for more information on the annual goodwill impairment test. 90

TABLE 4 - ASSETS SUMMARY AND COMPOSITION
September 30 December 31, Variance
2021 2020 %
(In thousands)
Investments:
FNMA and FHLMC certificates $ 570,489 $ 210,949 170.4%
Obligations of US government-sponsored agencies 1,280 1,606 -20.3%
US Treasury securities 10,875 10,983 -1.0%
CMOs issued by US government-sponsored agencies 27,625 39,214 -29.6%
GNMA certificates 271,828 182,772 48.7%
FHLB stock 7,496 8,278 -9.4%
Other debt securities 2,224 914 143.3%
Other investments 10,456 3,984 162.4%
Total investments 902,273 458,700 96.7%
Loans 6,282,485 6,501,259 -3.4%
Total investments and loans 7,184,758 6,959,959 3.2%
Other assets:
Cash and due from banks (including restricted cash) 2,745,854 2,143,669 28.1%
Money market investments 9,837 11,908 -17.4%
Foreclosed real estate 13,904 11,596 19.9%
Accrued interest receivable 56,815 65,547 -13.3%
Deferred tax asset, net 128,663 162,478 -20.8%
Premises and equipment, net 86,981 83,786 3.8%
Servicing assets 48,227 47,295 2.0%
Goodwill 86,069 86,069 0.0%
Operating lease right-of-use assets 30,625 31,383 -2.4%
Other intangible assets 38,545 45,896 -16.0%
Other assets and customers' liability on acceptances 176,587 176,425 0.1%
Total other assets 3,422,107 2,866,052 19.4%
Total assets $ 10,606,865 $ 9,826,011 7.9%
Investment portfolio composition:
FNMA and FHLMC certificates 63.2% 46.0%
Obligations of US government-sponsored agencies 0.1% 0.4%
US Treasury securities 1.2% 2.4%
CMOs issued by US government-sponsored agencies 3.1% 8.5%
GNMA certificates 30.1% 39.8%
FHLB stock 0.8% 1.8%
Other debt securities and other investments 1.5% 1.1%
100.0% 100.0%

91

TABLE 5 - LOAN PORTFOLIO COMPOSITON
September 30, December 31,
2021 2020
(In thousands)
Loans held for investment:
Commercial $ 2,331,056 $ 2,402,010
Mortgage 2,022,243 2,307,034
Consumer 374,631 391,287
Auto 1,682,933 1,561,802
6,410,863 6,662,133
Allowance for credit losses (180,872) (204,809)
Total loans held for investment 6,229,991 6,457,324
Mortgage loans held for sale 35,031 41,654
Other loans held for sale 17,463 2,281
Total loans, net $ 6,282,485 $ 6,501,259

OFG’s loan portfolio is composed of mortgage, commercial, consumer, and auto loans business products. As shown in Table 5 above, total loans, net, amounted to $6.282 billion at September 30, 2021 and $6.501 billion at December 31, 2020. OFG’s loans held-for-investment portfolio composition and trends were as follows:

 Commercial loan portfolio amounted to $2.331 billion (36.4% of the gross loan portfolio) compared to $2.402 billion (36.1% of the gross loan portfolio) at December 31, 2020. Commercial production, excluding PPP loan production, increased 45.8%, or $79.8 million, and 73.4% or $300.9 million to $254.2 million and $710.8 million in the quarter and nine-month period ended September 30, 2021, respectively, from $174.4 and $409.9 million for the same periods in 2020. PPP loan production decreased $10.3 million and $137.7 million in quarter and nine-months period ended September 30, 2021, respectively, from $10.3 million and $296.7 million for the same periods in 2020, as PPP program was initially launched in the second quarter of 2020 and concluded in 2021.

 Mortgage loan portfolio amounted to $2.022 billion (31.5% of the gross loan portfolio) compared to $2.307 billion (34.6% of the gross originated loan portfolio) at December 31, 2020. Mortgage loan production totaled $85.5 million and $285.2 million for the quarter and nine-month period ended September 30, 2021, respectively, which represents a decrease of 8.7% and an increase of 92.2% from $93.7 million and $148.4 million for the same periods in 2020. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $19.9 million and $56.2 million at September 30, 2021 and December 31, 2020, respectively. 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.

 Consumer loan portfolio amounted to $374.6 million (5.8% of the gross loan portfolio) compared to $391.3 million (5.9% of the gross loan portfolio) at December 31, 2020. Consumer loan production increased 115.0% to $50.6 million and 50.9% to $116.2 million for the quarter and nine-month period ended September 30, 2021, respectively, from $23.5 million and $77.0 million for the same periods in 2020.

 Auto and leasing portfolio amounted to $1.683 billion (26.3% of the gross loan portfolio) compared to $1.562 billion (23.4% of the gross loan portfolio) at December 31, 2020. Auto production increased 6.4% to $165.9 million and 55.6% to $486.3 million in the quarter and nine-month period ended September 30, 2021, respectively, compared to $155.9 million and $312.6 million for the same periods in 2020. 92

The following table includes the maturities of OFG's lending exposure to the Puerto Rico government, which is limited solely to loans to municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities and a loan to a public corporation acquired in the Scotiabank Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled 281.7 million at September 30, 2021.
TABLE 6 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES
September 30, 2021
Maturity
Carrying Value Less than 1 Year 1 to 3 Years More than 3 Years
Loans:
Public corporations 1,102 $ 1,102 $ - $ -
Municipalities 86,010 - 34,818 51,192
Total 87,112 $ 1,102 $ 34,818 $ 51,192

All values are in US Dollars.

At September 30, 2021, OFG has $87.1 million of direct credit exposure to the Puerto Rico government, a $12.0 million decrease from December 31, 2020.

Credit Risk Management

Allowance for Credit Losses

OFG maintains an allowance for credit losses at a level that management considers adequate to provide for lifetime expected losses based upon an evaluation of known and inherent risks and reasonable and supportable forecasts. OFG’s allowance for credit losses (“ACL”) policy provides for a detailed quarterly analysis of expected credit losses.

On January 1, 2020, OFG adopted the new CECL accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of future expected credit losses over the life of the Company’s relevant financial assets.

Tables 7 through 9 set forth an analysis of activity in the allowance for credit losses for the quarters and nine-month periods ended September 30, 2021 and 2020 and present selected credit loss statistics for September 30, 2021 and December 31, 2020. In addition, Table 5 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Credit Losses” section in the MD&A for a more detailed analysis of provisions for credit losses.

Non-performing Assets

OFG’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 10 and 12). At September 30, 2021, OFG had $123.9 million of non-accrual loans, including $38.8 million PCD loans accounted for under ASU 2016-13, compared to $147.9 million at December 31, 2020.

At September 30, 2021 and December 31, 2020, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-performing assets amounted to $122.5 million and $113.9 million, respectively.

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

At September 30, 2021, OFG’s non-performing assets decreased by 10.3% to $148.6 million (1.40% of total assets) from $165.6 million (1.69% of total assets) at December 31, 2020. Foreclosed real estate amounting to $13.9 million at September 30, 2021, increased from $11.6 million at December 31, 2020. Other repossessed assets amounting to $1.5 million at September 30, 2021, 93

decreased from $1.8 million at December 31, 2020. OFG does not expect non-performing loans to result in significantly higher losses. At September 30, 2021, the allowance coverage ratio to non-performing loans was 135.8% (134.6% at December 31, 2020).

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 PCD 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.

OFG follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major U.S. mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.

The following items comprise non-performing loans held for investment, Non-PCD and PCDs:

Commercial loans —At September 30, 2021, OFG’s non-performing commercial loans amounted to $65.3 million (49.0 % of OFG’s non-performing loans), a 16.8% decrease from $78.5 million at December 31, 2020 (51.6% of OFG’s non-performing loans). Non-PCD 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.

Residential mortgage loans —At September 30, 2021, OFG’s non-performing mortgage loans totaled $53.6 million (40.3% of OFG’s non-performing loans), a 10.1% increase from $48.7 million (32.0% of OFG’s non-performing loans) at December 31, 2020. Non-PCD residential 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.

Consumer loans —At September 30, 2021, OFG’s non-performing consumer loans amounted to $2.2 million (1.7% of OFG’s non-performing loans), a 47.9% decrease from $4.2 million at December 31, 2020 (2.8% of OFG’s non-performing loans). Non-PCD 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 —At September 30, 2021, OFG’s non-performing auto loans and leases amounted to $12.1 million (9.1% of OFG’s total non-performing loans), a decrease of 41.9% from $20.8 million at December 31, 2020 (13.6% of OFG’s total non-performing loans). Non-PCD 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.

OFG has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-Conforming Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing OFG’s losses on non-performing mortgage loans.

The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RURAL, PRHFA, conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by OFG. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and deed in lieu of foreclosure.

The Non-Conforming Mortgage Loan Program is for non-conforming mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-conforming mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed pursuant OFG’s current credit and underwriting guidelines. OFG achieved an affordable and sustainable monthly payment by taking 94

specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan.

In order to apply for any of our loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties. 95

TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN
September 30, December 31, Variance
2021 2020 %
(In thousands)
Allowance for credit losses:
Non-PCD:
Commercial $ 33,240 $ 45,779 -27.4%
Mortgage 16,867 19,687 -14.3%
Consumer 17,848 25,253 -29.3%
Auto and leases 70,919 70,296 0.9%
Total allowance for credit losses $ 138,874 $ 161,015 $ -13.8%
PCD:
Commercial $ 11,166 16,405 -31.9%
Mortgage 30,390 26,389 15.2%
Consumer 37 57 -35.1%
Auto and leases 405 943 -57.1%
Total allowance for credit losses $ 41,998 43,794 -4.1%
Allowance for credit losses summary
Commercial $ 44,406 $ 62,184 -28.6%
Mortgage 47,257 46,076 2.6%
Consumer 17,885 25,310 -29.3%
Auto and leases 71,324 71,239 0.1%
Total allowance for credit losses $ 180,872 $ 204,809 $ -11.7%
Allowance composition:
Commercial 24.6% 30.4%
Mortgage 26.1% 22.5%
Consumer 9.9% 12.4%
Auto and leases 39.4% 34.8%
100.0% 100.0%
Allowance coverage ratio at end of period:
Commercial 1.9% 2.6% -26.6%
Mortgage 2.3% 2.0% 17.0%
Consumer 4.8% 6.5% -26.3%
Auto and leases 4.2% 4.6% -7.0%
2.82% 3.1% -8.1%
Allowance coverage ratio to non-performing loans:
Commercial 68.0% 79.3% -14.2%
Mortgage 88.1% 94.6% -6.8%
Consumer 811.9% 599.1% 35.5%
Auto and leases 591.7% 343.1% 72.5%
135.8% 134.6% 0.9%

96

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY
Quarter Ended September 30, Variance Nine-Month Period Ended September 30, Variance
2021 2020 % 2021 2020 %
(In thousands)
Allowance for credit losses:
Balance at beginning of period $ 191,717 $ 232,701 -17.6% $ 204,809 $ 116,539 75.7%
Impact of ASC 326 adoption - - 0.0% - 89,720 -100.0%
Provision for credit losses (4,794) 13,182 -136.4% (6,664) 79,407 -108.4%
Charge-offs (16,237) (18,095) -10.3% (44,718) (71,021) -37.0%
Recoveries 10,186 7,525 35.4% 27,445 20,668 32.8%
Balance at end of period $ 180,872 $ 235,313 -23.1% $ 180,872 $ 235,313 $ -23.1%

97

TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES
Quarter Ended September 30, Variance Nine-Month Period Ended September 30, Variance
2021 2020 % 2021 2020 %
(Dollars in thousands)
Non-PCD:
Mortgage
Charge-offs $ (160) $ (56) 185.7% $ (1,216) $ (659) 84.5%
Recoveries 419 269 55.8% 1,227 527 132.8%
Total 259 213 21.6% 11 (132) -108.3%
Commercial
Charge-offs (7,518) (298) 2422.8% (8,238) (4,566) 80.4%
Recoveries 558 253 120.6% 1,983 2,407 -17.6%
Total (6,960) (45) 15366.7% (6,255) (2,159) 189.7%
Consumer
Charge-offs (2,370) (5,114) -53.7% (9,736) (15,316) -36.4%
Recoveries 894 663 34.8% 2,157 1,750 23.3%
Total (1,476) (4,451) -66.8% (7,579) (13,566) -44.1%
Auto and leases
Charge-offs (4,989) (10,123) -50.7% (19,242) (36,476) -47.2%
Recoveries 5,874 5,950 -1.3% 17,688 13,566 30.4%
Total 885 (4,173) -121.2% (1,554) (22,910) -93.2%
PCD:
Mortgage
Charge-offs $ (1,008) $ (1,677) -39.9% $ (5,340) $ (8,998) -40.7%
Recoveries 641 89 620.2% 971 791 22.8%
Total (367) (1,588) -76.9% (4,369) (8,207) -46.8%
Commercial
Charge-offs (68) (293) -76.8% (118) (3,036) -96.1%
Recoveries 1,316 91 1346.2% 2,183 752 190.3%
Total 1,248 (202) -717.8% 2,065 (2,284) -190.4%
Consumer
Charge-offs - (61) -100.0% (22) (521) -95.8%
Recoveries 219 - 100.0% 274 92 197.8%
Total 219 (61) 100.0% 252 (429) -158.7%
Auto and leases
Charge-offs (124) (474) -73.8% (806) (1,449) -44.4%
Recoveries 265 211 25.6% 962 783 22.9%
Total 141 (263) -153.6% 156 (666) -123.4%
Total charge-offs (16,237) (18,096) -10.3% (44,718) (71,021) -37.0%
Total recoveries 10,186 7,526 35.3% 27,445 20,668 32.8%
Net charge-offs $ (6,051) $ (10,570) -42.8% $ (17,273) $ (50,353) -65.7%
Net credit losses to average<br><br>loans outstanding: 98
Mortgage 0.02% 0.24% -91.08% 0.27% 0.47% -42.30%
Commercial 0.97% 0.04% 2334.35% 0.23% 0.25% -5.68%
Consumer 1.26% 3.94% -68.17% 2.41% 3.90% -38.17%
Auto and leases -0.25% 1.17% -121.19% 0.12% 2.07% -94.41%
Total 0.37% 0.62% -39.91% 0.35% 0.99% -64.62%
Recoveries to charge-offs 62.73% 41.59% 50.84% 61.37% 29.10% 110.90%
Average Loans Held for Investment
Mortgage $ 2,047,272 $ 2,325,756 -12.0% $ 2,145,635 $ 2,368,855 -9.4%
Commercial 2,360,642 2,484,977 -5.0% 2,402,904 2,403,377 0.0%
Consumer 400,582 457,620 -12.5% 404,672 477,889 -15.3%
Auto and leases 1,657,378 1,518,669 9.1% 1,612,889 1,521,783 6.0%
Total $ 6,465,874 $ 6,787,022 -4.7% $ 6,566,100 $ 6,771,904 -3.0%
TABLE 10 — NON-PERFORMING ASSETS
--- --- --- --- --- ---
September 30, December 31, Variance
2021 2020 (%)
(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans $ 26,586 $ 28,297 -6.0%
Other loans 58,537 82,122 -28.7%
Accruing loans
Troubled-Debt Restructuring loans 8,239 3,411 141.5%
Other loans 980 889 10.2%
Total $ 94,342 $ 114,719 -17.8%
PCD^[1]^ 38,828 37,475 3.6%
Total non-performing loans $ 133,170 $ 152,194 -12.5%
Foreclosed real estate 13,904 11,596 19.9%
Other repossessed assets 1,528 1,816 -15.9%
$ 148,602 $ 165,606 -10.3%
Non-performing assets to total assets 1.40% 1.69% -17.2%
Non-performing assets to total capital 14.10% 15.25% -7.5%
^[1]^ PCD loans on nonaccrual status

99

Quarter Ended September 30, Nine-Month Period Ended September 30,
2021 2020 2021 2020
(In thousands) (In thousands)
Interest that would have been recorded in the period if the<br><br>loans had not been classified as non-accruing loans $ 634 $ 855 $ 1,558 $ 1,879
TABLE 11 — NON-ACCRUAL LOANS
--- --- --- --- --- ---
September 30, December 31 Variance
2021 2020 %
(Dollars in thousands)
Non-accrual loans:
Non-PCD loans
Commercial $ 28,473 $ 41,999 -32.2%
Mortgage 42,392 43,430 -2.4%
Consumer 2,200 4,224 -47.9%
Auto and leasing 12,055 20,766 -41.9%
85,120 110,419 -22.9%
PCD loans
Commercial 36,798 36,471 0.9%
Mortgage 2,030 1,003 102.4%
Consumer - 1 -100.0%
38,828 37,475 3.6%
Total $ 123,948 $ 147,894 -16.2%
Non-performing loans composition percentages:
Commercial 52.7% 53.1%
Mortgage 35.8% 30.0%
Consumer 1.8% 2.9%
Auto and leasing 9.7% 14.0%
Total 100.0% 100.0%
Non-accrual loans ratios:
Non-accrual loans to total loans 1.93% 2.22% -13.1%
Allowance for credit losses to non-accrual loans 145.93% 138.48% 5.4%

100

TABLE 12 - NON-PERFORMING LOANS
September 30, December 31, Variance
2021 2020 %
(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial $ 28,472 $ 41,999 -32.2%
Mortgage 51,612 47,730 8.1%
Consumer 2,203 4,224 -47.8%
Auto and leases 12,055 20,766 -41.9%
Total $ 94,342 $ 114,719 -17.8%
PCD
Commercial $ 36,798 $ 36,471 0.9%
Mortgage 2,030 1,003 100.0%
Consumer - 1 -100.0%
Total $ 38,828 $ 37,475 3.6%
Total non-performing loans $ 133,170 $ 152,194 -12.5%
Non-performing loans composition percentages:
Commercial 49.0% 51.6%
Mortgage 40.3% 32.0%
Consumer 1.7% 2.8%
Auto and leases 9.1% 13.6%
100.0% 100.0%
Non-performing loans to:
Total loans 2.1% 2.3% -8.8%
Total assets 1.3% 1.6% -18.7%
Total capital 12.6% 14.0% -9.8%
Non-performing loans with partial charge-offs to:
Total loans 0.5% 0.6% -8.8%
Non-performing loans 25.1% 24.8% 1.2%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken 181.2% 151.3% 19.7%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken 181.4% 179.0% 1.3%

101

TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
September 30, December 31, Variance
2021 2020 %
(Dollars in thousands)
Deposits:
Non-interest bearing deposits $ 2,695,993 $ 2,259,048 19.3%
NOW accounts 2,835,075 2,354,194 20.4%
Savings and money market accounts 2,378,205 1,944,426 22.3%
Certificates of deposit 1,334,324 1,856,400 -28.1%
Total deposits 9,243,597 8,414,068 9.9%
Accrued interest payable 792 1,572 -49.6%
Total deposits and accrued interest payable 9,244,389 8,415,640 9.8%
Borrowings:
Advances from FHLB 62,559 65,561 -4.6%
Subordinated capital notes 36,083 36,083 0.0%
Other term notes 375 707 -47.0%
Total borrowings 99,017 102,351 -3.3%
Total deposits and borrowings 9,343,406 8,517,991 9.7%
Other Liabilities:
Securities purchased but not yet received 31,565 - 100.0%
Derivative liabilities 1,136 1,712 -33.6%
Acceptances outstanding 24,371 33,349 -26.9%
Lease liability 32,167 32,566 -1.2%
Other liabilities 120,555 154,418 -21.9%
Total liabilities $ 9,553,200 $ 8,740,036 9.3%
Deposits portfolio composition percentages:
Non-interest bearing deposits 29.2% 26.8%
NOW accounts 30.7% 28.0%
Savings and money market accounts 25.7% 23.1%
Certificates of deposit 14.4% 22.1%
100.0% 100.0%
Borrowings portfolio composition percentages:
Advances from FHLB 63.2% 64.1%
Other term notes 0.4% 0.7%
Subordinated capital notes 36.4% 35.2%
100.0% 100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end $ - $ -
Daily average outstanding balance $ - $ 50,492
Maximum outstanding balance at any month-end $ - $ 190,000

Liabilities and Funding Sources

As shown in Table 13 above, at September 30, 2021, OFG’s total liabilities were $9.553 billion, 9.3% more than the $8.740 billion reported at December 31, 2020. Deposits and borrowings, OFG’s funding sources, amounted to $9.343 billion at September 30, 2021 versus $8.518 billion at December 31, 2020, a 9.7% increase, mainly from higher core deposits by $1.352 billion, while time deposits, brokered deposits and borrowings decreased by $509.2 million, $13.6 million and $3.3 million, respectively.

At September 30, 2021, deposits represented 99% and borrowings represented 1% of interest-bearing liabilities. At September 30, 2021, deposits, the largest category of OFG’s interest-bearing liabilities, were $9.244 billion, an increase of 9.8% from $8.416 billion

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at December 31, 2020, reflecting higher commercial deposits from existing and new clients and higher retail deposits as a result of increased liquidity in the economy from government stimulus.

Borrowings consist mainly of FHLB-NY advances and subordinated capital notes. The overall declines in time deposits, brokered deposits and borrowings are part of the strategy to replace higher cost funding with lower cost core deposits.

Stockholders’ Equity

At September 30, 2021, OFG’s total stockholders’ equity was $1.054 billion, a 3.0% decrease when compared to $1.086 billion at December 31, 2020. This reduction in stockholders’ equity reflects decrease in preferred stock of $92.0 million due to the Series A, Series B and Series D preferred stock redemptions, in accumulated other comprehensive income, net of tax, of $2.4 million, and in treasury stock of $37.9 million due to repurchases of $41.2 million, as part of buy back program of $50 million implemented during the quarter ended September 30, 2021. Decrease was offset by, increase in legal surplus of $11.2 million, in retained earnings of $75.6 million, and additional paid-in capital of $13.2 million. Book value per share was $21.08 at September 30, 2021 compared to $19.54 at December 31, 2020.

From December 31, 2020 to September 30, 2021, tangible common equity to tangible total assets decreased from 9.00% to 8.86%, leverage capital ratio decreased from 10.30% to 9.33%, tier 1 risk-based capital ratio decreased from 14.78% to 14.03%, and total risk-based capital ratio decreased from 16.04% to 15.28%, as a result of the preferred stock redemptions and stock repurchase program. Common equity tier 1 capital ratio increased from 13.08% to 13.52% from net income during the nine-month period ended September 30, 2021, partially offset by the stock repurchase program.

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The current risk-based capital standards applicable to OFG and the Bank (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of September 30, 2021, the capital ratios of OFG and the Bank continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

On January 1, 2020, the Company implemented CECL using the modified retrospective approach. As a result, a $39.2 million allowance for credit losses was recorded for Non-PCD loans and $0.2 million for unused commitments with the corresponding adjustment reducing retained earnings, net of a $13.9 million deferred tax effect. For more information, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. On March 27, 2020, in response to the Covid-19 pandemic, U.S. banking regulators issued an interim final rule that the Company 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 will add back to common equity tier 1 (“CET1”) capital 100% of the initial adoption impact of CECL plus 25% 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 a three-year period.

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 non-advanced approaches banking organizations the regulatory capital treatment for mortgage servicing assets (“MSAs”) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases CET1 capital threshold deductions from 10% to 25% and removes the aggregate 15% CET1 threshold deduction. However, it retains the 250% risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. On January 1, 2020, the Company elected to early implement the simplifications to the capital rule.

The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of September 30, 2021 and December 31, 2020, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

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The following are OFG’s consolidated capital ratios under the Basel III capital rules at September 30, 2021 and December 31, 2020:

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA
September 30, December 31, Variance
2021 2020 %
(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity $ 1,053,665 $ 1,085,975 -3.0%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio 13.52% 13.08% 3.4%
Minimum common equity tier 1 capital ratio required 4.50% 4.50% 0.0%
Actual common equity tier 1 capital $ 931,885 894,075 4.2%
Minimum common equity tier 1 capital required $ 310,196 307,703 0.8%
Minimum capital conservation buffer required (2.5%) $ 172,331 170,946 0.8%
Excess over regulatory requirement $ 449,357 415,426 8.2%
Risk-weighted assets $ 6,893,254 6,837,846 0.8%
Tier 1 risk-based capital ratio 14.03% 14.78% -5.1%
Minimum tier 1 risk-based capital ratio required 6.00% 6.00% 0.0%
Actual tier 1 risk-based capital $ 966,885 $ 1,010,945 -4.4%
Minimum tier 1 risk-based capital required $ 413,595 $ 410,271 0.8%
Minimum capital conservation buffer required (2.5%) $ 172,331 170,946 0.8%
Excess over regulatory requirement $ 380,959 $ 429,728 -11.3%
Risk-weighted assets $ 6,893,254 $ 6,837,846 0.8%
Total risk-based capital ratio 15.28% 16.04% -4.7%
Minimum total risk-based capital ratio required 8.00% 8.00% 0.0%
Actual total risk-based capital $ 1,053,185 $ 1,096,766 -4.0%
Minimum total risk-based capital required $ 551,460 $ 547,028 0.8%
Minimum capital conservation buffer required (2.5%) $ 172,331 170,946 0.8%
Excess over regulatory requirement $ 329,394 $ 378,972 -13.1%
Risk-weighted assets $ 6,893,254 $ 6,837,846 0.8%
Leverage capital ratio 9.33% 10.30% -9.5%
Minimum leverage capital ratio required 4.00% 4.00% 0.0%
Actual tier 1 capital $ 966,885 $ 1,010,945 -4.4%
Minimum tier 1 capital required $ 414,708 $ 392,424 5.7%
Excess over regulatory requirement $ 552,177 $ 618,521 -10.7%
Tangible common equity to total assets 8.76% 8.88% -1.4%
Tangible common equity to risk-weighted assets 13.48% 12.75% 5.7%
Total equity to total assets 9.93% 11.05% -10.1%
Total equity to risk-weighted assets 15.29% 15.88% -3.8%
Stock data:
Outstanding common shares 49,977,236 51,387,071 -2.7%
Book value per common share $ 21.08 $ 19.54 7.9%
Tangible book value per common share $ 18.59 $ 16.97 9.5%
Market price at end of period $ 25.22 $ 18.54 36.0%
Market capitalization at end of period $ 1,260,426 $ 952,716 32.3%

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The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at September 30, 2021 and December 31, 2020:

September 30, December 31,
2021 2020
(In thousands, except share or per share information)
Total stockholders' equity $ 1,053,665 $ 1,085,975
Preferred stock - (92,000)
Preferred stock issuance costs - 10,130
Goodwill (86,069) (86,069)
Core deposit intangible (29,468) (34,983)
Customer relationship intangible (8,934) (10,629)
Other intangibles (143) (284)
Total tangible common equity (non-GAAP) $ 929,051 $ 872,140
Total assets 10,606,865 9,826,011
Goodwill (86,069) (86,069)
Core deposit intangible (29,468) (34,983)
Customer relationship intangible (8,934) (10,629)
Other intangibles (143) (284)
Total tangible assets $ 10,482,251 $ 9,694,046
Tangible common equity to tangible assets 8.86% 9.00%
Common shares outstanding at end of period 49,977,236 51,387,071
Tangible book value per common share $ 18.59 $ 16.97

The tangible common equity ratio and tangible book value per common share are non-GAAP measures and, unlike tier 1 capital and common equity tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which OFG calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. To mitigate these limitations, OFG has procedures in place to calculate these measures using the appropriate GAAP or regulatory components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

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The following table presents OFG’s capital adequacy information under the Basel III capital rules:

September 30, December 31, Variance
2021 2020 %
(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital $ 931,885 $ 894,075 4.2%
Additional tier 1 capital 35,000 116,870 -70.1%
Tier 1 capital 966,885 1,010,945 -4.4%
Additional Tier 2 capital 86,300 85,820 0.6%
Total risk-based capital $ 1,053,185 $ 1,096,765 -4.0%
Risk-weighted assets:
Balance sheet items $ 6,312,427 $ 6,338,524 -0.4%
Off-balance sheet items 580,827 499,322 16.3%
Total risk-weighted assets $ 6,893,254 $ 6,837,846 0.8%
Ratios:
Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%) 13.52% 13.08% 3.4%
Tier 1 capital (minimum required, including capital conservation buffer - 8.5%) 14.03% 14.78% -5.1%
Total capital (minimum required, including capital conservation buffer - 10.5%) 15.28% 16.04% -4.7%
Leverage ratio (minimum required - 4%) 9.33% 10.30% -9.4%
Equity to assets 9.93% 11.05% -10.1%
Tangible common equity to assets 8.76% 8.88% -1.4%

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The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at September 30, 2021 and December 31, 2020:

September 30, December 31, Variance
2021 2020 %
(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets 13.45% 14.06% -4.3%
Actual common equity tier 1 capital $ 921,975 $ 956,845 -3.6%
Minimum capital requirement (4.5%) $ 308,528 $ 306,206 0.8%
Minimum capital conservation buffer requirement (2.5%) $ 171,404 $ 170,114 0.8%
Minimum to be well capitalized (6.5%) $ 445,651 $ 442,297 0.8%
Tier 1 Capital to Risk-Weighted Assets 13.45% 14.06% -4.3%
Actual tier 1 risk-based capital $ 921,975 $ 956,845 -3.6%
Minimum capital requirement (6%) $ 411,370 $ 408,274 0.8%
Minimum capital conservation buffer requirement (2.5%) $ 171,404 $ 170,114 0.8%
Minimum to be well capitalized (8%) $ 548,493 $ 544,366 0.8%
Total Capital to Risk-Weighted Assets 14.70% 15.32% -4.0%
Actual total risk-based capital $ 1,007,817 $ 1,042,255 -3.3%
Minimum capital requirement (8%) $ 548,493 $ 544,366 0.8%
Minimum capital conservation buffer requirement (2.5%) $ 171,404 $ 170,114 0.8%
Minimum to be well capitalized (10%) $ 685,617 $ 680,457 0.8%
Total Tier 1 Capital to Average Total Assets 8.96% 9.81% -8.7%
Actual tier 1 capital $ 921,975 $ 956,845 -3.6%
Minimum capital requirement (4%) $ 411,478 $ 390,304 5.4%
Minimum to be well capitalized (5%) $ 514,348 $ 487,879 5.4%

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At September 30, 2021 and December 31, 2020, OFG’s market capitalization for its outstanding common stock was $1.260 billion ($25.22 per share) and $952.7 million ($18.54 per share), respectively.

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The following table provides the high and low prices and dividends per share of OFG’s common stock for each quarter of the last three calendar years:

Cash
Price Dividend
High Low Per share
2021
September 30, 2021 $ 25.66 $ 20.04 $ 0.12
June 30, 2021 $ 25.14 $ 21.61 $ 0.08
March 31, 2021 $ 22.93 $ 16.48 $ 0.08
2020
December 31, 2020 $ 18.54 $ 12.59 $ 0.07
September 30, 2020 $ 14.35 $ 12.12 $ 0.07
June 30, 2020 $ 15.10 $ 9.38 $ 0.07
March 31, 2020 $ 23.50 $ 9.32 $ 0.07
2019
December 31, 2019 $ 23.61 $ 20.00 $ 0.07
September 30, 2019 $ 24.20 $ 19.84 $ 0.07
June 30, 2019 $ 23.77 $ 18.78 $ 0.07
March 31, 2019 $ 21.24 $ 16.37 $ 0.07

In July 2021, the Company announced the approval by the Board of Directors of a stock repurchase program to purchase an additional $50 million of the Company’s common stock in the open market.

Under OFG’s stock repurchase program in effect at September 30, 2021, it was authorized to purchase in the open market up to $50.0 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by OFG as treasury shares. During the nine-month period ended September 30, 2021, OFG repurchased 1,684,921 shares under this program for a total of $40.2 million, at an average price of $23.83 per share. During the nine-month period ended September 30, 2020, OFG repurchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. OFG did not repurchase any shares of its common stock in the quarters and nine-month periods ended on September 30, 2021 and 2020, other than through its publicly announced stock repurchase program.

At September 30, 2021, the number of shares that may yet be purchased under such program is estimated at 390,652 and was calculated by dividing the remaining balance of $9.8 million by $25.22 (closing price of OFG's common stock at September 30, 2021).

Impact of Inflation and Changing Prices

The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

OFG’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk and Compliance Officer, the Board’s Risk and Compliance Committee, the executive Risk and Compliance Team, the executive Credit Risk Team, and the executive Asset/Liability Team (“ALT”). OFG has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

All aspects of OFG’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, OFG’s primary risk exposures include market, interest rate, credit, liquidity, operational and concentration risks.

Market Risk

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. OFG evaluates market risk together with interest rate risk. OFG’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by OFG complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the ALT which is composed of certain executive officers from the business, treasury and finance areas. One of ALT’s primary goals is to ensure that the market risk assumed by OFG is within the parameters established in such policies.

Interest Rate Risk

Interest rate risk is the exposure of OFG’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings. OFG manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALT oversees interest rate risk, liquidity management and other related matters.

In executing its responsibilities, ALT examines current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and any tax or regulatory issues which may be pertinent to these areas.

On a quarterly basis, OFG performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous interest rate movements are also modeled. Simulations are carried out in two ways:

(i) using a static balance sheet as OFG had on the simulation date, and

(ii) using a dynamic balance sheet based on recent organic growth patterns and core business strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

OFG uses a software application to project future movements in OFG’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

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These simulations are complex and use many assumptions that are intended to reflect the general behavior of OFG over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at September 30, 2021 for the most likely scenario, assuming a one-year time horizon:

Net Interest Income Risk (one-year projection)
Static Balance Sheet Growing Simulation
Amount Percent Amount Percent
Change Change Change Change
Change in interest rate (Dollars in thousands)
+ 200 Basis points $ 32,476 8.57% $ 24,568 5.57%
+ 100 Basis points $ 16,431 4.34% $ 12,532 2.84%
- 50 Basis points $ (6,569) -1.73% $ (7,427) -1.68%

Future net interest income could be affected by OFG’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of OFG’s assets and liabilities, OFG has executed certain transactions which include extending the maturity and the re-pricing frequency of the liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-NY as of September 30, 2021.

OFG maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. OFG’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings is expected to be substantially offset by OFG’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. OFG considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by OFG’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease.

Derivative instruments that are used as part of OFG’s interest risk management strategy include interest rate swaps and option contracts that have indices related to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based on a common notional principal amount and maturity date. Interest rate options represent contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some purchased option contracts give OFG the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, OFG enters into certain transactions that contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value.

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Following is a summary of certain strategies, including derivative activities, currently used by OFG to manage interest rate risk:

Interest rate swaps and wholesale borrowings — OFG uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix OFG’s interest payments on these borrowings. As of September 30, 2021, OFG had $28.9 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for $62.6 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis. A derivative liability of $1.1 million was recognized at September 30, 2021 related to the valuation of these swaps.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for OFG is its lending activities. In Puerto Rico, OFG’s principal market, economic conditions have been very challenging for over a decade due to a shrinking population, a protracted economic recession, declining real estate values, the Puerto Rico government’s fiscal and liquidity crisis, and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board for Puerto Rico. In addition, as was demonstrated by the January 2020 earthquakes and hurricanes Irma and Maria in September 2017, Puerto Rico is susceptible to natural disasters, which can have a disproportionate impact because of the logistical difficulties of bringing relief to an island far from the United States mainland. Possible future climate changes may increase this risk. Moreover, the Puerto Rico government's fiscal challenges and Puerto Rico's unique relationship with the United States also complicate any relief efforts after a natural disaster. These events increase credit risk as debtors may no longer be capable of operating their businesses and the collateral securing OFG's loans may suffer significant damages.

OFG manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. OFG also employs proactive collection and loss mitigation practices.

OFG may also encounter risk of default in relation to its securities portfolio. The securities held by OFG are mostly agency mortgage-backed securities. Thus, these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full faith and credit of the U.S. government.

OFG’s executive Credit Risk Team, composed of its Chief Operating Officer, Chief Risk and Compliance Officer, and other senior executives, has primary responsibility for setting strategies to achieve OFG’s credit risk goals and objectives. Those goals and objectives are set forth in OFG’s Credit Policy as approved by the Board.

In the year 2020, the Covid-19 pandemic negatively impacted economic activity in Puerto Rico, the U.S. and around the world. To provide relief to individuals and businesses in the U.S., the government enacted several economic stimulus packages, including the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act, and the American Rescue Plan. The federal banking regulatory agencies also issued interagency guidance to financial institutions working with borrowers affected by Covid-19. Stimulus funds have provided significant liquidity to businesses and individuals, and, during the nine-month period ended September 30, 2021, Puerto Rico is experiencing signs of economic revival and asset quality trends continue to improve.

To support our customers, we implemented various loan modification programs and other forms of support, including offering loan payment deferrals, waiver of certain fees and pausing foreclosure sales, evictions and repossessions. For a description of the loan modification programs that we have implemented, see Recent Developments – Covid-19 Pandemic 2020 of the MD&A in this quarterly report. For information on the accounting for loan modifications related to the Covid-19 pandemic, see Note 1 – Summary of Significant Accounting Policies in the 2020 10-K Annual Report.

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Liquidity Risk

Liquidity risk is the risk of OFG not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. OFG’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required.

OFG’s business requires continuous access to various funding sources. While OFG is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, OFG’s business may at times need to rely upon other external wholesale funding sources. OFG has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements and brokered deposits. As of September 30, 2021, OFG had $11.4 million in brokered deposits.

Brokered deposits are typically offered through an intermediary to small retail investors. OFG’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, OFG’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits. As a result of the increase in core deposits from the Scotiabank Acquisition and organic growth, OFG has been limiting the offering of brokered deposits.

Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by OFG upon extension of credit, is based on management’s credit evaluation of the customer. Loan commitments, which represent unused lines of credit, increased to $1.298 billion at September 30, 2021 as compared to $1.134 billion at December 31, 2020, while letters of credit provided to customers increased to $35.6 million as compared to $19.7 million at December 31, 2020. Loans sold with recourse at September 30, 2021 and December 31, 2020 amounted to $124.9 million and $135.3 million, respectively. In addition, at September 30, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $10.1 million and $9.0 million, respectively, primarily for the acquisition of other investments.

Our liquidity risk management practices have allowed us to effectively manage the market stress that began in the first quarter of 2020 from the Covid-19 pandemic. Requests for loan payment deferrals rose in the second quarter of 2020. Nevertheless, most payment deferrals ended in the third quarter of 2020, with only 0.7% of total loans remaining at September 30, 2021 compared to 30% at September 30, 2020. Even though OFG’s liquidity has been impacted by loan principal and interest payment deferrals that have been granted for certain customers due to Covid-19, liquidity has been growing from the federal stimulus programs Puerto Rico is receiving following 2017’s Hurricane Maria, the early 2020 earthquakes, and now the Covid-19 pandemic. In the case of loans serviced by OFG for FNMA, OFG is required to advance to the owners the payment of principal and interest on a scheduled basis for six months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by OFG and are expected to be collected from the borrower and/or government agency (FNMA). Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to Covid-19 concerns.

Although OFG expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative developments occur with respect to OFG, the availability and cost of OFG’s funding sources could be adversely affected. In that event, OFG’s cost of funds may increase, thereby reducing its net interest income, or OFG may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon any such dispositions. OFG’s efforts to monitor and manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by OFG or market-related events. In the event that such sources of funds are reduced or eliminated, and OFG is not able to replace these on a cost-effective basis, OFG may be forced to curtail or cease its loan origination business and treasury activities, which would have a material adverse effect on its operations and financial condition.

As of September 30, 2021, OFG had approximately $2.8 billion in unrestricted cash and cash equivalents, $571.3 million in investment securities that are not pledged as collateral, and $700.5 million in borrowing capacity at the FHLB-NY.

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Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of OFG are susceptible to operational risk.

OFG faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products and services. Coupled with external influences such as the risk of natural disasters, market conditions, security risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, OFG has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that OFG’s business operations are functioning within established limits.

OFG classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, OFG has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology, Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the executive Risk and Compliance Team and the executive Consumer Compliance Team. OFG also has a Business Continuity Plan to address situations where its capacity to perform critical functions is affected. Under such circumstances, a Crisis Management Team is activated to restore such critical functions within established timeframes.

The Business Continuity Plan has allowed us to effectively manage the operational disruption that began in the first quarter of 2020 from the Covid-19 pandemic. For more information on the effects of the pandemic, see Recent Developments – Covid-19 Pandemic 2020 of the MD&A in this quarterly report.

OFG is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. OFG has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. OFG has a corporate compliance function headed by a Chief Risk and Compliance Officer who reports to the Chief Executive Officer and supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and Compliance Officer is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, including the Bank Secrecy Act/Anti-Money Laundering compliance program.

Concentration Risk

Most of OFG’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, OFG’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political, fiscal or economic developments in Puerto Rico, or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

113

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of OFG’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of OFG’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, OFG’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by OFG in the reports that it files or submits under the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within OFG to disclose material information otherwise required to be set forth in OFG’s periodic reports.

Internal Control over Financial Reporting

There have not been any changes in Oriental’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, Oriental’s internal control over financial reporting.

114

PART - II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

OFG and its subsidiaries are defendants in a number of legal proceedings incidental to their business. OFG is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on OFG’s financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Oriental’s annual report on Form 10-K for the year ended December 31, 2020. In addition to other information set forth in this report, you should carefully consider the risk factors included in Oriental’s annual report on Form 10-K, as updated by this report or other filings Oriental makes with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to Oriental at this time or that Oriental currently deems immaterial may also adversely affect Oriental’s business, financial condition or results of operations.

115

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS

In July 2021, the Company announced the approval by the Board of Directors of a stock repurchase program to purchase $50 million of the Company’s common stock in the open market.

Any shares of common stock repurchased are held by the Company as treasury shares. The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. During the nine-month period ended September 30, 2021, the Company purchased 1,684,921 shares under this program for a total of $40.2 million, at an average price of $23.83 per share.

The following table presents the shares repurchased for each month during the nine-month period ended September 30, 2021, excluding the months during which no shares were purchased as part of the stock repurchase program:

Total number of Maximum approximate
shares purchased dollar value of shares
Total number of Average price paid as part of publicly that may yet be purchased
Period shares purchased per share announced programs under the programs
(In thousands, except per share data)
August 1-31, 2021 1,100 $ 23.85 1,100 $ 23,768
September 1-30, 2021 585 23.78 585 9,839
Nine month period ended<br><br>September 30, 2021 1,685 $ 23.83 1,685 $ 9,839

The number of shares that may yet be purchased under the current $50 million program is estimated at 390,652 and was calculated by dividing the remaining balance of $9.8 million by $25.22 (closing price of the Company’s common stock at September 30, 2021). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during the nine month period ended September 30, 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

116

ITEM 6. EXHIBITS

Exhibit No. Description of Document:

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

101 The following materials from OFG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

117

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OFG Bancorp

(Registrant)

By: /s/ José Rafael Fernández Date: November 5, 2021
José Rafael Fernández
Chief Executive Officer
By: /s/ Maritza Arizmendi Díaz Date: November 5, 2021
Maritza Arizmendi Díaz
Chief Financial Officer
By: /s/ Krisen Aguirre Torres Date: November 5, 2021
Krisen Aguirre Torres
Director, Reporting and Accounting Control

118

ofg10q09302021ex311

1

EXHIBIT 31.1

MANAGEMENT CERTIFICATION

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,

José Rafael Fernández

, Chief Executive Officer of OFG Bancorp, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of OFG Bancorp;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or

omit to state a material fact

necessary to make the statements made, in light of the circumstances under

which such statements were made, not

misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included

in this report, fairly present in

all material respects the financial condition, results of operations and

cash flows of the registrant as of, and for, the periods

presented in this report;

4

.

The registrant’s other certifying officer

and I are responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal

control over financial reporting (as

defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure

controls and procedures to be

designed under our supervision, to ensure that material information relating

to the registrant, including its

consolidated subsidiaries, is made known to us by others within those entities, particularly

during the period

in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal

control over financial

reporting to be designed under our supervision, to provide reasonable assurance

regarding the reliability of

financial reporting and the preparation of financial statements for external

purposes in accordance with U. S.

generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s

disclosure controls and procedures and presented in this report

our conclusions about the effectiveness of the disclosure controls and

procedures, as of the end of the period

covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s

internal control over financial reporting that occurred

during the registrant’s most recent fiscal year

that has materially affected, or is reasonably likely to

materially affect the registrant’s

internal control over financial reporting; and

5

.

The registrant’s other certifying officer

and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the registrant’s auditors

and the audit committee of the registrant’s

board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal

control over

financial reporting which are reasonably likely to adversely affect

the registrant’s ability to record,

process,

summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a

significant role

in the registrant’s internal control

over financial reporting.

Date: November 5, 2021

By:

/s/ José Rafael Fernández

José Rafael Fernández

Chief Executive Officer

ofg10q09302021ex312

1

EXHIBIT 31.2

MANAGEMENT CERTIFICATION

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,

Maritza Arizmendi

, Chief Financial Officer of OFG Bancorp, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of OFG Bancorp;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact

or omit to state a material

fact necessary to make the statements made, in light of the circumstances under which

such statements were made, not

misleading with respect to the period covered by this report;

3

.

Based on my knowledge, the financial statements, and other financial information included

in this report, fairly present in

all material respects the financial condition, results of operations and

cash flows of the registrant as of, and for, the periods

presented in this report;

4

.

The registrant’s other certifying officer

and I are responsible for establishing and maintaining disclosure controls

and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal

control over financial reporting (as

defined in Exchange Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure

controls and procedures to be

designed under our supervision, to ensure that material information relating

to the registrant, including its

consolidated subsidiaries, is made known to us by others within those entities, particularly

during the period

in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal

control over financial

reporting to be designed under our supervision, to provide reasonable assurance

regarding the reliability of

financial reporting and the preparation of financial statements for external

purposes in accordance with U.S.

generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s

disclosure controls and procedures and presented in this report

our conclusions about the effectiveness of the disclosure controls and

procedures, as of the end of the period

covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s

internal control over financial reporting that occurred

during the registrant’s most recent fiscal year

that has materially affected, or is reasonably likely to

materially affect the registrant’s

internal control over financial reporting; and

5.

The registrant’s other certifying officer

and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the registrant’s auditors

and the audit committee of the registrant’s

board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of

internal control over

financial reporting which are reasonably likely to adversely affect

the registrant’s ability to record,

process,

summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who

have a significant

role in the registrant’s internal control

over financial reporting.

Date: November 5, 2021

By:

/s/ Maritza Arizmendi

Maritza Arizmendi

Chief Financial Officer

ofg10q09302021ex321

1

EXHIBIT 32.1

CERTIFICATION

PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. §1350)

In connection with OFG Bancorp’s

quarterly report on Form 10-Q for the quarter ended September 30, 2021, as filed

with the

Securities and Exchange Commission on the date hereof (the “Report”),

I, José Rafael Fernández, Chief Executive Officer of OFG

Bancorp, hereby certify,

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350),

that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the

Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition

and results of

operations of OFG Bancorp.

In witness whereof, I execute this certification in San Juan, Puerto Rico,

this 5th day of November 2021.

By:

/s/ José Rafael Fernández

José Rafael Fernández

Chief Executive Officer

ofg10q09302021ex322

1

EXHIBIT 32.2

CERTIFICATION

PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. §1350)

In connection with OFG Bancorp’s

quarterly report on Form 10-Q for the period ended September 30, 2021, as filed

with the

Securities and Exchange Commission on the date hereof (the “Report”),

I, Maritza Arizmendi, Chief Financial Officer of OFG

Bancorp, hereby certify,

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350),

that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the

Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition

and results of

operations of OFG Bancorp.

In witness whereof, I execute this certification in San Juan, Puerto Rico,

this 5th day of November 2021.

By:

/s/ Maritza Arizmendi

Maritza Arizmendi

Chief Financial Officer

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